Co-Insurance for Condominiums...What??
Yesterday, I received a call from a property manager with whom we work to help his clients to obtain FHA Condo Approvals. One of his clients that is currently on the FHA Approved Condominiums List was inquiring about the impact of co-insurance to their FHA approval.
The Association is working to renew its insurance coverage. Because of the insurance claims that the Association has filed in the past few years, the only lines available are much more expensive than what the HOA is currently paying. In an effort to save money, the Board of Directors was investigating an 80% co-insurance policy for its master hazard insurance.
As is intuitive, the policy would only cover 80% of a partial or complete loss due to a catastrophic event. The Association would have to contribute the other 20%. The property manager was advising against this and contacted me to see if it would impact the FHA condo project approval.
Actually, it does not impact the project’s approval and it won’t impact its recertification either. This is because FHA does not verify whether the master hazard insurance coverage is adequate when approving condominium projects.
However, when someone applies for a loan, the lender will verify whether the insurance coverage meets FHA’s standards. FHA’s guidelines state that the hazard insurance must equal 100% of the replacement cost of the condominium. Therefore, the project may be approved, but the inadequate 80% co-insurance would prohibit any FHA loans within the project.
But wait…there’s more!
Fannie Mae also has a requirement for 100% replacement coverage. According to Question 8 of Fannie Mae’s FAQ’s for Project Insurance Requirements dated 4/8/2014:
“Does the master insurance policy or a related endorsement have to state ‘100%’ replacement cost?
“No, but the amount of coverage described in the terms of the policy and/or endorsements must equal 100% of the insurable replacement cost of the project improvements.”
In other words, by trying to save some money and opting for an 80% co-insurance policy, the Association would eliminate conventional and FHA financing options within the project. I am sure that you can imagine what that would do to the ability to obtain financing or the negative impact that it would have on the property values in the condominium.
I hope the Board of the Association makes the proper decision now that it has all of the information.
Image courtesy of David Castillo Dominici/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at email@example.com or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
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Check out our article in Common Interest magazine on page 19!