Condo Contents Insurance -- What You Need to Know

Dear Ali:
I am buying a condo. Is there a Federal requirement that a borrower have insurance coverage of at least 20 percent of fair market value on contents in order to qualify for a loan?
A: Yes. You may be surprised by this because requirements for contents coverage were just changed last year. Let me start by saying that "contents coverage" is exactly what it sounds like -- coverage of what's inside your condo -- your furniture, clothing, media, decor, etc.

It's a good idea to have the coverage. What if there's a leak in your ceiling and it drips onto your piano?

Now, in terms of a "Federal requirement," according to my mortgage guru, Sunny Hong, field manager at Bank of America Home Loans in New York City, FHA, Fannie Mae, and Freddie Mac all require HO-6 insurance, a requirement that was added in 2009. HO-6 insurance is a fancy way of saying contents insurance (also sometimes known as "walls-in" insurance or "studs-in" insurance).

Fannie and Freddie aren't mortgage originators, of course, but they're such giants in the resale market that what they say is taken as gospel by mortgage lenders.

"Twenty percent of fair market value" is just what it sounds like: if you're buying a $400,000 condo, you need $80,000 of contents insurance. This will typically come with a small liability policy on the side.

However, some lenders have side agreements with the FHA that allow them to bypass the required insurance provision. "It's confusing for us," says Hong, "because Bank of America has a different agreement with the FHA, so we can close without it until April 30, 2011."

So if you're being asked for contents coverage, talk to your lender and see what juice they have.

However, even if you can manage to sidestep the mortgage requirement, there are two additional reasons to buy contents coverage:

  1. It might be a condo board requirement. Regardless of a federal mandate, each association is allowed to run by its own bylaws, and your particular condo association might have insurance requirements for individual owners. This can apply to all types of insurance. It's common in New York City, for example, for condo boards to require owners to carry $500,000 or even $1 million in liability insurance, for instance. Before you buy, make sure that you (or your attorney) checks in to see what the building requirements are because you'll have to follow them.
  2. You might be in a flood zone. You'll have to buy flood insurance, which is a separate insurance product, if you're in a high-risk area. But interestingly enough, the Federal Emergency Management Agency (FEMA) recommends that all owners, regardless of where their property is situated, carry flood insurance. (That's been a plot point on this season of Treme, the HBO show about Katrina survivors, as the Albert Lambreaux character has been fighting with the insurance company over a claim for his flooded home; the insurance company maintains that his home was destroyed by flood, not hurricane, and that it does not need to reimburse him as he did not carry flood insurance.)Now if you're an apartment dweller, you may be thinking, "hey, I don't need any flood coverage, I'm on the 10th floor!" but here's the good news about condo contents coverage: FEMA guidelines allow 10 percent of contents coverage to be applied to flood damage of the interior of a home, such as walls and ceilings.