What Coverage Your Property Insurance Must Include
Fannie Mae requires your homeowners insurance to cover eight specific perils. These are not optional — your policy must include all of them or you need to buy separate coverage for any that are excluded.
The required perils are fire or lightning, explosion, windstorm (including named storms), hail, smoke, aircraft, vehicles, and riot or civil commotion. Most standard homeowners policies cover these automatically, but some budget policies or policies in high-risk areas might exclude certain perils like windstorm.
Say you live in Florida and your standard policy excludes windstorm coverage. You would need to buy a separate windstorm policy to meet Fannie Mae requirements. The same applies if you have an older policy that excludes coverage for damage from named storms designated by the National Weather Service.
Your policy must be written on a "Special" coverage form. This is insurance industry terminology for comprehensive coverage that protects against all perils except those specifically excluded. Basic or broad form policies do not meet Fannie Mae standards.
Why Replacement Cost Coverage Matters
Your insurance must settle claims on a replacement cost basis. This means if your home is damaged, the insurance company pays what it costs to rebuild or repair with materials of like kind and quality at current prices.
Actual cash value policies are not acceptable. These policies subtract depreciation from the settlement amount. If your 10-year-old roof is damaged, an actual cash value policy might only pay 50% of replacement cost after factoring in depreciation.
Some policies advertise replacement cost coverage but include fine print that limits payouts to actual cash value for certain items like roofs or HVAC systems. These policies do not meet Fannie Mae requirements either.
How Much Insurance Coverage You Need
The required coverage amount follows a specific calculation. Your lender will determine the replacement cost value of your home's improvements (not including the land) and compare it to your loan balance.
If the replacement cost is less than your loan balance, you need insurance equal to the full replacement cost. If your loan balance is less than the replacement cost, you need coverage equal to your loan balance — but only if that amount is at least 80% of the replacement cost.
Here's an example: Your home has a replacement cost of $200,000 and your loan balance is $150,000. Since $150,000 is 75% of replacement cost (less than the required 80%), you need $160,000 in coverage (80% of $200,000).
Another scenario: Your replacement cost is $200,000 and your loan balance is $180,000. Since $180,000 equals 90% of replacement cost (more than 80%), you only need $180,000 in coverage.
Who Determines Replacement Cost Value
Your lender uses professional sources to verify replacement cost. This might be your insurance company, an independent insurance risk specialist, or another qualified professional with the resources to make accurate determinations.
The verification can come from several sources: a statement from your insurer, a replacement cost estimator, or an insurance risk appraisal. Your lender cannot simply accept your word or use rough estimates.
During the life of your loan, your servicer will periodically review your coverage to ensure it still meets requirements. As your loan balance decreases through payments, the required coverage amount may also decrease.
Deductible Limits You Need to Know
Your deductible cannot exceed 5% of your total coverage amount. If you have $200,000 in coverage, your maximum allowable deductible is $10,000.
This rule applies to the total of all deductibles that could apply to a single incident. Some policies have separate deductibles for different perils — like a $1,000 standard deductible plus a $5,000 windstorm deductible. The combined total cannot exceed 5% of your coverage.
Percentage-based deductibles are common in coastal areas. If your policy has a 2% windstorm deductible on a $200,000 policy, that equals $4,000. Combined with other deductibles, you need to ensure the total stays under the 5% limit.
Special Considerations for Solar Panels
Properties with leased solar panels or panels owned by a third party under a power purchase agreement have additional requirements. The guideline references B2-3-04: Special Property Eligibility Considerations for these specific situations.
These arrangements can complicate insurance coverage because you may not own the panels but could be responsible for damage to them. Your lender will need to verify that coverage addresses these ownership complexities.
Required Documentation for Your Lender
Your lender needs specific documentation to verify your insurance meets requirements. This includes your insurance policy declarations page showing coverage amounts, perils covered, deductibles, and policy effective dates.
The policy must name your lender as mortgagee and include provisions for the lender to receive notice if you cancel the policy or if the insurance company cancels it. These requirements are detailed in B7-3-08: Mortgagee Clause, Named Insured, and Notice of Cancellation Requirements.
You'll also need to provide evidence that your premium is paid. Most lenders require you to escrow insurance premiums, meaning you pay them monthly as part of your mortgage payment and the lender pays the insurance company directly.
Common Problems That Can Derail Your Loan
The most frequent issue is insufficient coverage amounts. Many borrowers assume their current insurance automatically meets mortgage requirements, but older policies may have coverage limits that no longer reflect current replacement costs.
Another common problem is policies that exclude required perils. This often happens in areas prone to specific disasters where insurers have started excluding certain coverage types. You might need to shop for a different insurer or buy additional policies.
High deductibles can also create problems. Some borrowers choose high deductibles to lower premiums without realizing they exceed Fannie Mae limits. You may need to adjust your deductible to qualify for the loan.
Actual cash value policies are frequently problematic. Some insurers market these as "replacement cost" but include depreciation clauses that make them unacceptable. Read your policy carefully or have your agent confirm the settlement basis.
References
For the official guidelines, see B7-3-02: Property Insurance Requirements for One-to Four-Unit Properties in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties (02/07/2024)
Coverage Requirements
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.
✓
Explosion
Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number)
Riot or civil commotion
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 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 Considerations, for additional requirements.
See B7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation Requirements for additional requirements applicable to a one- to four-unit property.
Determining the Required Coverage Amount
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.
1
Compare the replacement cost value of the improvements to the unpaid principal balance (UPB) of the loan.
1A
If the replacement cost value of the improvements is less than the UPB, the replacement cost value is the amount of coverage required.
1B
If the UPB of the loan is less than the replacement cost value of the improvements, go to Step 2.
2
Calculate 80% of the replacement cost value of the improvements.
2A
If the result of this calculation is equal to or less than the UPB of the loan, the UPB is the amount of coverage required.
2B
If the result of this calculation is greater than the UPB of the loan, this calculated figure is the amount of coverage required.
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:
$90,000
$100,000
$100,000
$95,000
$90,000
$75,000
80% of the Replacement Cost Value
—
$80,000
$80,000
$90,000
$90,000
$80,000
Step 2B
See Servicing Guide, B-2-01, Property Insurance Applicable to All Property Types, for additional servicer responsibilities related to property insurance for second mortgages.
Deductible Requirements
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.
