Why Fannie Mae Cares About Your Insurance Company's Rating
Fannie Mae requires your property insurance to come from financially stable companies because they need assurance that claims will be paid if your home is damaged or destroyed. A weak insurance company that goes bankrupt leaves both you and your mortgage lender exposed to massive losses.
Think of it this way: if your $400,000 home burns down and your insurance company can't pay the claim because it's insolvent, you still owe the full mortgage balance but have no house. Fannie Mae protects against this scenario by only accepting coverage from insurers with strong financial ratings.
The rating requirement applies to the insurance company itself, not your specific policy. Your lender will verify the insurer's rating when you apply for your mortgage and again whenever you change insurance companies.
Which Insurance Companies Meet the Requirements
Your insurance company must meet the minimum rating from at least one of these four rating agencies:
- AM Best Company: "B" or better Financial Strength Rating
- Demotech, Inc.: "A" or better Insurance Financial Stability Rating
- Kroll Bond Rating Agency: "BBB" or better Insurance Financial Strength Rating
- S&P; Global: "BBB" or better Insurer Financial Strength Rating
Most major insurance companies like State Farm, Allstate, USAA, and Travelers easily meet these requirements. Many regional and smaller insurers also qualify. Your insurance agent can tell you which rating agencies have evaluated their company and what ratings they've received.
The company only needs to meet the minimum rating from one agency, even if it's rated by multiple agencies. For example, if an insurer has a "C+" from AM Best but an "A" from Demotech, it still qualifies because it meets Demotech's requirement.
When You Can Use Lower-Rated Insurance Companies
Fannie Mae makes exceptions when higher-rated coverage isn't available. You can use state insurance plans or lower-rated insurers in specific situations.
State FAIR plans and windstorm pools are acceptable even if the insurer doesn't meet the normal rating requirements. These government-backed programs exist in states where private insurance is scarce due to natural disaster risks. Florida's Citizens Property Insurance and California's FAIR plan are common examples.
You can only use these state plans if they're your only option at closing or when your policy renews. Your lender will need documentation showing that properly rated insurers either declined to cover your property or quoted prices that make coverage unavailable.
Special Rules for Reinsurance Arrangements
Some insurance companies that don't meet Fannie Mae's ratings use reinsurance to qualify. Reinsurance is like insurance for insurance companies — a stronger company agrees to pay claims if the primary insurer fails.
For reinsurance arrangements to work, several conditions must be met. The reinsuring company must have the required AM Best or S&P; Global rating. Both the primary insurer and reinsurer must be licensed in your state. The reinsurance agreement needs a "cut-through" endorsement that makes the reinsurer immediately liable for 100% of claims if the primary company becomes insolvent.
Both companies must also execute an Assumption of Liability Endorsement. This paperwork ensures there's no gap in coverage if the primary insurer fails. Your lender will verify all these requirements are in place.
What Documents Your Lender Needs
Your lender must verify your insurance company's rating before approving your loan. They'll typically check the rating agencies' websites or use industry databases to confirm the insurer meets requirements.
You'll need to provide a copy of your insurance policy or a certificate of insurance that shows the insurance company name, policy limits, and effective dates. The lender will cross-reference this information with the insurer's current ratings.
If you're using a state plan or reinsurance arrangement, your lender may need additional documentation. For state plans, they might require proof that private coverage was unavailable. For reinsurance, they'll need copies of the reinsurance agreement and endorsements.
Common Problems That Can Delay Your Closing
The most common issue is choosing an insurance company that doesn't meet Fannie Mae's rating requirements. Some smaller regional insurers or newer companies may not have ratings from the approved agencies, or their ratings might be too low.
Rating changes can also create problems. Insurance companies can be downgraded between the time you get a quote and when you close on your loan. Your lender will verify the rating close to closing, so a recent downgrade could force you to find new coverage.
Another pitfall involves online insurance companies or non-standard insurers. Some companies that offer very low rates may not meet the rating requirements. Always verify the insurer's rating before committing to a policy, especially if the price seems too good to be true.
Second mortgage borrowers sometimes assume they can use any insurance company, but if Fannie Mae also owns the first mortgage, the same rating requirements apply to both loans.
What Happens After You Close
The rating requirements continue throughout your loan's life. If your insurance company is downgraded below the minimum requirements, your loan servicer may require you to find new coverage from a qualified insurer.
When you shop for new insurance or your policy comes up for renewal, make sure any new company you consider meets the rating requirements. This prevents potential issues with your mortgage servicer and ensures your coverage will be accepted.
Your servicer monitors your insurance coverage and will contact you if there are any issues with your insurer's rating or if your policy doesn't meet other Fannie Mae requirements covered in related guidelines like B7-3-02: Property Insurance Requirements for One-to Four-Unit Properties for specific property types.
References
For the official guidelines, see B7-3-01: General Property Insurance Requirements for All Property Types in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B7-3-01, General Property Insurance Requirements for All Property Types (12/14/2022)
Property Insurer Rating Requirements
Exceptions to Insurer Rating Requirements
Other Exceptions to Property Insurance Requirements
Overview
The borrower has the right to select the insurer of their choice to provide property insurance for the subject property, provided that the insurance meets Fannie Mae's requirements. The lender or servicer must ensure that the insurer, policy, and coverage meet Fannie Mae's requirements. In some cases, Fannie Mae may require additional coverage that differs from these requirements.
Note: References to "lender or servicer" include the lender or seller at origination and the servicer for the duration of loan servicing.
Property Insurer Rating Requirements
The property insurance policy for the property securing any first mortgage, including master policies for project developments, must be written by an insurer that meets one of the rating requirements in the following table.
“B” or better Financial Strength Rating
Demotech, Inc.
“A” or better Insurance Financial Stability Rating
Kroll Bond Rating Agency
“BBB” or better Insurance Financial Strength Rating (IFSR)
S&P Global
“BBB” or better Insurer Financial Strength Rating
Note: An insurer is only required to meet the rating category requirement for one of the rating agencies, even if they are rated by multiple rating agencies.
Exceptions to Insurer Rating Requirements
The following are exceptions to Fannie Mae’s insurer rating requirements:
Second Mortgages — The property insurance policy for a property that secures a second mortgage does not have to be written by an insurer that meets Fannie Mae’s rating requirements, unless Fannie Mae also has an interest in the first mortgage.
Mortgage Impairment (or Mortgagee Interest) Insurance — If the lender or servicer, as applicable, is covered by a mortgage impairment (or mortgagee interest) insurance policy, and the issuer meets either the AM Best Financial Strength Rating or S&P Global Insurer Financial Strength Rating, as listed in Property Insurer Rating Requirements, Fannie Mae does not require confirmation that the borrower’s property insurance coverage is with an insurer that meets Fannie Mae’s rating requirements. However, in such instances, the lender should advise the borrower of Fannie Mae’s requirements when it originates the loan.
Reinsurance Arrangements — Policies written by an insurer that do not meet Fannie Mae’s rating requirements are acceptable provided all conditions outlined in the following table are met.
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Conditions for Acceptable Reinsurance Arrangements
The insurer is covered by reinsurance with a company that meets the AM Best Financial Strength Ratings or S&P Global Insurer Financial Strength Rating, as listed in Property Insurer Rating Requirements.
The primary insurer and the reinsuring company are authorized (or licensed, if required) to transact business within the state where the property is located.
The reinsurance agreement has a “cut-through” endorsement that provides for the reinsurer to become immediately liable for 100% of any loss payable by the primary insurer in the event the primary insurer becomes insolvent.
Both the primary insurer and the reinsuring company execute an Assumption of Liability Endorsement (
Other Exceptions to Property Insurance Requirements
Fannie Mae also accepts the following types of property insurance policies if they are the only coverage that can be obtained at the time of the loan closing or policy renewal:
policies obtained through state or territory insurance plans, including a state’s Fair Access to Insurance Requirements (FAIR) plan, or
other state-mandated windstorm and beach erosion insurance pools.
