Fannie Mae Insurance Guidelines
The Federal National Mortgage Association (Fannie Mae) is the nation's largest buyer of mortgage loans in the secondary mortgage market. Fannie Mae operates differently than the FHA. Instead of insuring loans, it buys FHA insured loans from mortgage lenders.
When mortgage lenders loan their money to home buyers, loan activity slows down until he lender can acquire new funds. This is where Fannie Mae gets involved. Lenders can bundle their FHA-insured mortgages and sell them to Fannie Mae. With a fresh infusion of cash, lenders can make new loans to home buyers and start the cycle again.
Since mortgage lenders need a steady flow of new cash for mortgage loans, they will conform their lending practices to both FHA and Fannie Mae guidelines. A condominium project must meet the following insurance requirements to satisfy Fannie Mae:
- The Building Limits for the project must be rated 100% Replacement;
- The Extended Coverage Endorsement must apply to the Building Coverage;
- The Property Coverage Form Must Be "Primary" and not "Excess".
- An "Inflation Guard Endorsement" Must Apply to the Building Coverage if available;
- There must be no Coinsurance Penalties;
- There cannot be "walls-in" insurance coverage.
- HO-6 coverage is required, or an amount of coverage sufficient to repair the condominium to its condition prior to a loss whether the claim is paid by the association's property insurance, by the homeowner's HO-6 policy, or some combination of both.
- The Fidelity Coverage must be equal to or greater than three months total assessments;
- The Fidelity Coverage must extend to the property manager and their employees.
- Projects with central heat and air must have a "Mechanical Breakdown Endorsement".
- Adequate Building Ordinance Coverage must be carried,
- Master Flood Insurance is required if the project is located in a Designated Special Flood Hazard Area (SFHA);
- A Workers' Compensation Policy is required;
- At least 51 % of the project must be owner occupied;
- No more than 20% of the total square footage of the project can be used for commercial purposes;
- No more than 15% of the units in an attached condominium project can be delinquent in their HOA assessments;
- At least 10% of the budget must be allocated to reserves;
- The association must have adequate funding for insurance deductibles. Fannie Mae does not require a separate budget line item for insurance deductibles, but the potential cost of deductibles must be accounted for in the budget. Insurance deductibles may be included in the reserve fund or may be a separate item;
- No single person or entity can own more than 10% of the units in the project; and
- Management contracts may not require a penalty payment or advance notice of more than 90 days for termination of the contract.
Requirements are different for new projects, small projects (1-10 units), co-ops, planned developments, condominium conversions, and manufactured housing.
Fannie Mae posts a list of approved projects for each state on their website.
If associations want to maximize the marketability of units in their developments, boards should talk to their independent insurance brokers about Fannie Mae's requirements and determine whether any changes need to be made to their current insurance coverage. Because Fannie Mae's requirements may conflict with CC&R provisions, boards should include legal counsel in their evaluation. For more information, see Fannie Mae's selling guide for complete and up to date requirements.
HOA Financial Management Services