What Your Lender Checks on Your Home Insurance

If your loan is being written to be sold to Fannie Mae, the insurance policy has to match its Selling Guide, and that check happens before the file clears. These are Fannie Mae’s requirements for the loans it purchases, not a federal or Massachusetts rule, and your own lender can tell you what its file needs.

The deductible cap

For a one to four unit property, the maximum allowable deductible for all required perils is 5% of the property insurance coverage amount. If the policy sets separate deductibles for different required perils, such as windstorm or wildfire, each individual deductible must not exceed the same 5%. A deductible set high to bring the premium down can put the policy over that line, which is worth checking before you bind it.

The perils the policy has to cover

The guide says policies on one to four unit properties should be written on a Special coverage form or equivalent, and that at a minimum the coverage must include the perils in its table: fire or lightning, explosion, windstorm (including named storms designated by the National Weather Service or NOAA), hail, smoke, aircraft, vehicles, and riot or civil commotion. If a policy excludes or limits any of them, the borrower has to obtain acceptable coverage for that peril, which can be a stand-alone policy.

Replacement cost, and the roof

Coverage sufficiency turns on the loss settlement terms. The policy has to provide coverage on a replacement cost basis, with the exception of roofs. Roofs must be insured, but they don’t have to be insured on a replacement cost basis. The guide also notes that some insurers write actual cash value terms for personal property and for structures that aren’t buildings, and that this is acceptable.

The insurer’s rating

The policy securing a first mortgage has to be written by an insurer that meets one of four rating requirements: an AM Best Financial Strength Rating of B or better, a Demotech Insurance Financial Stability Rating of A or better, a Kroll Bond Rating Agency Insurance Financial Strength Rating of BBB or better, or an S&P Global Insurer Financial Strength Rating of BBB or better. An insurer only has to meet the category at one of those agencies, even if several of them rate it.

Who picks, and what the lender sees

The guide opens by saying the borrower has the right to select the insurer of their choice, as long as the insurance meets the requirements. The lender’s job is to verify that a valid policy exists and meets them. It may accept a certificate of property insurance instead of the complete policy, as long as the certificate carries everything needed to make that determination and is signed by the insurer.

What to do with this

Get a quote while the inspection period is still open, so the premium and the deductible are known before you’re committed. Ask your loan officer whether the file wants the policy itself or a signed certificate, and send it over well before the closing week. Under agreement? Send me the quote before you bind it. This is general information, not insurance advice. Diana Kim, REALTOR®, eXp Realty.