Fannie Mae’s condo insurance requirements fall into two parts: the homeowners association must carry master property, general liability, fidelity, and (in flood zones) flood policies that meet specific minimums, and the individual unit owner usually needs an HO-6 policy to cover everything the master policy leaves out. If any required piece is missing or falls short, the project can be classified as non-warrantable and conventional financing dries up for every unit, not just yours.
Master Property Policy the HOA Must Carry
Under Selling Guide section B7-3-03, the HOA’s master property policy must cover every residential building and all common elements at 100% of current replacement cost, and claims must be settled on a replacement cost basis rather than actual cash value. Policies that depreciate, cap, or otherwise reduce loss settlements below full replacement cost are not acceptable.1Fannie Mae. Master Property Insurance Requirements for Project Developments
The policy must be written on a “Special” coverage form or its equivalent. At minimum it must cover every peril in a commercial “Broad” form: fire, lightning, windstorm (including named storms), hail, explosion, smoke, vandalism, falling objects, weight of snow or ice, and water damage. If the master policy excludes or limits any of those perils, the HOA has to buy a separate stand-alone policy to fill the gap.1Fannie Mae. Master Property Insurance Requirements for Project Developments
Condo master policies also need a Condominium Association Coverage Form endorsement (or equivalent) that does three things: recognizes an insurance trustee for claims payments, waives the insurer’s right to recover from individual unit owners, and establishes the master policy as primary over any individual unit owner’s coverage.1Fannie Mae. Master Property Insurance Requirements for Project Developments
Deductible Cap and Loss Assessment
Fannie Mae caps the master policy deductible at 5% of the total coverage amount per occurrence. If the policy carries separate deductibles for different perils, such as a windstorm deductible stacked on a roof deductible, the combined total for any single event still cannot exceed 5%.1Fannie Mae. Master Property Insurance Requirements for Project Developments
There is one exception for hurricane- and earthquake-prone areas. Fannie Mae will accept a per-unit deductible that pushes the project’s combined deductible above 5% if two conditions are met: the per-unit deductible applies to named perils common and customary in that geographic area, and the individual borrower’s own policy covers those perils, covers any deductible assessment the HOA levies on the unit owner, and includes loss assessment coverage sufficient for the borrower’s share of anything above 5% of the master policy coverage amount divided by the number of units.1Fannie Mae. Master Property Insurance Requirements for Project Developments
That is where loss assessment coverage on an HO-6 earns its place. After a large loss, the HOA pays the master deductible and bills each owner’s share back as a special assessment. On a 50-unit building with a $500,000 deductible, that is $10,000 per owner before any interior repair even begins. Loss assessment coverage reimburses those charges. Industry guidance generally suggests at least $25,000 to $50,000 in limits, though the right number depends on your building’s deductible and unit count. Divide the master deductible by the number of units to find your floor.
General Liability
The HOA must carry commercial general liability covering all common areas, any commercial spaces the association owns (even if leased out), and any other areas the association maintains. The minimum limit is $1 million per occurrence for bodily injury and property damage, and premiums must be paid as a common expense.2Fannie Mae. General Liability Insurance Requirements for Project Developments
The policy must include a severability of interests (sometimes called “separation of insureds”) provision. Without it, an insurer could deny a unit owner’s claim against the association on the theory that the claimant and the insured sit on the same policy. Fannie Mae requires either built-in severability language or a specific endorsement that keeps the insurer from using the HOA’s negligence as grounds to deny an individual owner’s claim.2Fannie Mae. General Liability Insurance Requirements for Project Developments
Fidelity and Crime Coverage
Because condo associations handle significant sums through assessments and reserves, Selling Guide section B7-4-02 requires fidelity and crime insurance against theft or dishonest acts by board members, employees, or management companies. The required amount depends on whether the association uses certain financial controls.3Fannie Mae. Fidelity/Crime Insurance Requirements for Project Developments
Fannie Mae recognizes three controls that lower the minimum:
- Separate accounts: the working account and reserve account are held in separate bank accounts with appropriate access controls, and the bank sends monthly statements directly to the HOA.
- Management company segregation: if a management company handles funds, it keeps separate records and accounts for each association and cannot draw on the reserve account on its own.
- Dual-signature requirement: two board members must sign any check drawn on the reserve account.
With at least one of those controls in place, the fidelity policy must cover at least three months of total assessments collected from all units. Without any of them, the required coverage jumps to the maximum amount of funds in the association’s custody (or its management agent’s custody) at any time, which is almost always much larger.3Fannie Mae. Fidelity/Crime Insurance Requirements for Project Developments
Flood Insurance in Special Hazard Areas
If any unit in the project sits in a Special Flood Hazard Area (FEMA zones A or V), the HOA must maintain a master flood policy on the building that contains the unit. The standard vehicle is a Residential Condominium Building Association Policy, or RCBAP, which covers the whole building rather than individual units.4Fannie Mae. Flood Insurance Requirements for All Property Types
Required building coverage is the lesser of 80% of the building’s replacement cost value or the NFIP maximum per unit.4Fannie Mae. Flood Insurance Requirements for All Property Types Under NFIP, the maximum RCBAP building coverage is $250,000 multiplied by the number of units in the building.5FEMA. Simple Guide for Residential Condominium Buildings If the master flood policy hits the 80% threshold but the per-unit coverage still falls short of what Fannie Mae requires for an individual 1-4 unit loan, the unit owner has to carry a supplemental individual flood policy for the difference.
The master flood deductible cannot exceed the maximum NFIP currently offers for condos insured under an RCBAP. Contents coverage must equal the lesser of 100% of the replacement cost of all contents owned in common by the association or the NFIP contents maximum of $100,000.4Fannie Mae. Flood Insurance Requirements for All Property Types A few narrow exceptions let detached condos, units in two- to four-unit projects, and some high-LTV refinances satisfy the flood requirement with an individual dwelling policy instead of a master RCBAP, but those situations are uncommon in typical mid- and high-rise buildings.
What the Unit Owner’s HO-6 Must Do
Even with a solid master policy, the individual borrower usually needs an HO-6. Selling Guide B7-3-04 covers individual property insurance in project developments, and B7-3-05 covers additional insurance requirements. An HO-6 is required whenever the master policy does not provide walls-in coverage, which is the case for most associations. The HO-6 protects interior finishes, built-in appliances, flooring, cabinetry, and any improvements the owner has made.6Fannie Mae. Additional Insurance Requirements
The lender sets the required coverage amount based on what it would cost to restore the unit’s interior to its pre-loss condition, and the policy must stay in force for the life of the loan. If the master policy is unusually broad and covers interior components, the HO-6 requirement may be reduced, but lenders rarely waive it entirely. They review the association’s governing documents to see where the HOA’s responsibility ends and the owner’s begins.
Beyond dwelling coverage, the HO-6 is also where loss assessment coverage lives and, in flood zones, where you add any supplemental flood coverage needed to bridge the gap between the RCBAP and Fannie Mae’s per-unit requirement.
If Your HO-6 Lapses
A lapse triggers force-placed insurance. Under CFPB rules, your servicer must send written notice at least 45 days before charging you for force-placed coverage, a reminder at least 30 days later and no fewer than 15 days before the charge, and only then may it buy a policy on your behalf and bill you. Force-placed premiums commonly run 1.5 to 10 times the cost of a policy you would buy yourself, and the coverage is typically narrower. If you provide evidence of continuous coverage within 15 days of the servicer receiving it, the force-placed policy must be canceled and overlapping premiums refunded.7Consumer Financial Protection Bureau. 12 CFR 1024.37 Force-placed Insurance Setting up autopay on renewal is the simplest way to avoid the whole process.
When a Project Falls Short
If the HOA’s insurance does not meet Fannie Mae’s standards, the entire project can be classified as non-warrantable. Fannie Mae will not purchase or securitize mortgages secured by units in ineligible projects, so conventional financing through most major lenders disappears for every unit in the building.8Fannie Mae. Ineligible Projects
Buyers who still need a mortgage are typically pushed into portfolio loans from smaller banks or credit unions, or non-qualified mortgage products. Expect a larger down payment (often around 30%), higher interest rates, and fewer lenders willing to look at the deal. Because the warrantability issue sometimes surfaces only when the appraisal and condo questionnaire come back, buyers can learn days before closing that their financing has fallen through. Resale value takes a hit too: a smaller pool of eligible buyers means less demand, longer time on market, and downward pressure on prices.
How to Check Your Project’s Compliance
Lenders use Fannie Mae’s optional Condominium Project Questionnaire (Form 1076) to collect the data needed to confirm a project meets eligibility standards, including insurance, and they must retain evidence of all insurance policies for as long as they originate mortgages in the project and until every loan sold to Fannie Mae has been paid off.9Fannie Mae. General Information on Project Standards
As a current owner or buyer, you can ask the management company or board for copies of the HOA’s insurance certificates. When you review them, confirm the following:
- Replacement cost basis on the master property policy, not actual cash value.
- Coverage at 100% of the replacement cost of all buildings and common elements.
- Deductible no more than 5% of the total policy coverage amount per occurrence.
- General liability of at least $1 million per occurrence with severability of interests language.
- Fidelity/crime coverage of at least three months of total assessments where financial controls are in place.
- Where applicable, an RCBAP covering at least 80% of replacement cost or the NFIP per-unit maximum, whichever is less.
If something looks off, raise it with the board before you close on a purchase or refinance. Fixing an insurance gap in advance is almost always cheaper than dealing with a non-warrantable designation or an uninsured loss after the fact.