Fannie Mae Guidelines-Part 2

This is a continuance of my prior post on Fannie Mae lending guidelines that impact buyers/sellers of condominiums and town homes. Prior to the issuance of revised guidelines last year a lender had no interest in whether or not buyer had unit owner coverage; now unit owners will be required to have coverage prior to the close of escrow just like a buyer of a single family home must provide evidence of insurance before escrow can close.

As this new requirement will cost the buyer additional money it may seem that the long-arm of the government has once again extended its reach beyond where it needs to be. However, this development is a positive for all of those who reside in condo or town home communities; let me explain. All community associations are required to have a master insurance policy that protects the complex and association. However, in the event of destruction of one or all buildings in a complex most association master policies only cover the rebuilding of the exterior of the building. Individual unit owners bear the responsibility of rebuilding the interior of the unit - drywall, flooring, kitchen cabinets/fixtures, interior walls, etc. If a unit owner does not have an individual policy or his/her policy does not have the coverage to rebuild the interior this financial burden falls to the savings of the unit owner. Depending on the size and amenities of the unit this bill could range from $40,000 to $150,000+.

An example of how the current situation negatively impacts associations let's say a building containing eight units is a complete loss due to an accidental kitchen fire. The association master policy provides money to rebuild the building exterior and six of eight unit owners receive monies from their individual unit owner policies to rebuild the interiors of their units. Unfortunately two unit owners did not purchase an individual unit owner policy (the national average is 25% of unit owners do not have coverage) so they will not be receiving a settlement to rebuild. If they are like most people they may not have the personal savings to fall back on either; so you have the very real possibility of these two unit owners walking away from their homes and foreclosing. For the association there is a loss of monthly dues and other issues that come with having empty units. Do the math on a 300-unit complex where 25% of unit owners are caught short; it is not a pretty picture.

All unit owners should check their individual insurance policies to make sure they have a coverage called building property (some carriers call it dwelling). Many unit owners who have policies have no or insufficient building property coverage because they bought strictly on price. The key question here is do you have enough coverage to rebuild the interior of the unit the way you have it now? Some associations has master policies that provide coverage for both the exterior and interior of the building; it's best to check with your agent to determine exactly what is covered.