As many of you have experienced, Fannie Mae and Freddy Mac now require a certificate or binder of insurance be recorded at the time of closing for condominium and townhome purchases. How does coverage work for this type of purchase and why is a binder now necessary?
An HO-6 policy provides coverage for a unit owner’s personal property and liability (for suits brought against them). The coverage can also extend to certain “real” property found inside the unit. This “real” property typically includes floor, wall and window coverings, cabinetry, light fixtures, molding, etc. and is often referred to as “additions and alterations”.
Historically, Associations would provide “All-In” coverage on the internal real property of a unit (also known as additions and alterations) via the Association’s master policy. This means that an Association’s master policy would cover all additions or alterations within a owner’s unit. Over the past several years, Community Associations have altered their governing documents with respects internal real property and have made it the responsibility of the unit owner to provide coverage for additions and alterations. It took years, but Fannie Mae and Freddy Mac have finally caught on that a large portion of their collateral (the unit) was uninsured if a unit owner was not purchasing a properly written HO-6 policy that provided coverage for additions and alterations.
The actual Fannie Mae/Freddy Mac requirement reads:
Part XII, Chapter 5, Insurance Requirements require that lenders verify that hazard insurance for all condominium projects with attached units covers fixtures, equipment and other personal property inside individual units if they will be financed by the mortgage.
The updated policy now requires that the borrower obtain a “walls-in” coverage policy (commonly known as HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage.
The result of all this? A unit owner now has to provide a binder of insurance at closing evidencing coverage for internal real property if their Association’s master policy does not extend coverage.