B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties (02/07/2024)

Property insurance policies for one- to four-unit properties securing loans purchased by Fannie Mae should be written on a "Special" coverage form or equivalent. At a minimum, the coverage must include the perils listed in the following table.

If a property insurance policy excludes or limits coverage of any of the required perils, the borrower must obtain an acceptable stand-alone policy that provides adequate coverage for the limited or excluded peril (see  B7-3-05, Additional Insurance RequirementsB7-3-05, Additional Insurance Requirements, for additional information).

The property insurance policy must provide for claims to be settled on a replacement cost basis. Property insurance policies that provide for claims to be settled on an actual cash value basis are not acceptable. Policies that limit, depreciate, reduce or otherwise settle losses at anything other than a replacement cost basis are also not acceptable.

Additional requirements apply to properties with solar panels that are leased from or owned by a third party under a power purchase agreement or other similar arrangement. See  B2-3-04, Special Property Eligibility ConsiderationsB2-3-04, Special Property Eligibility Considerations, for additional requirements.

See  B7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation RequirementsB7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation Requirements for additional requirements applicable to a one- to four-unit property.

The lender or servicer must verify that the property insurance coverage amount for a first mortgage secured by a one- to four-unit property is at least equal to the lesser of:

• 100% of the replacement cost value of the improvements as of the current property insurance policy effective date, or
• the unpaid principal balance of the loan, provided it equals no less than 80% of the replacement cost value of the improvements as of the current property insurance policy effective date.

The source that the lender or servicer uses to verify the coverage amount may be the property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination. This may include, but is not limited to, a statement from the insurer or other applicable professional, a replacement cost estimator, or an insurance risk appraisal.

If the coverage amount does not meet the minimum required, coverage that does provide the minimum required amount must be obtained.

The following table provides the steps to calculate the amount of required property insurance coverage.

Note: When calculating the required amount of property insurance coverage, the loan amount must be used at origination and the UPB must be used during servicing of the loan.

Examples:

See Servicing Guide, B-2-01, Property Insurance Applicable to All Property Types, for additional servicer responsibilities related to property insurance for second mortgages.

The maximum allowable deductible for all required property insurance perils for one-to four-unit properties is 5% of the property insurance coverage amount.

When a property insurance policy includes multiple deductibles, such as a separate deductible that applies to windstorms, or a separate deductible that applies to a specific property element such as the roof, the total amount for such deductibles applicable to a single occurrence must be no greater than 5% of the property insurance coverage amount.