Fidelity Bond Insurance: Can I Get a Co-op Loan Without It?
Dear Ali:
My bank is denying the mortgage loan for the co-op I want to buy because the co-op does not have enough Fidelity Bond insurance. The co-op does not want to raise the insurance to the bank's requirement -- a minimum of three months' maintenance. Could I go to another bank to get the mortgage loan? Or do all banks have to abide by Fannie Mae's guidelines on Fidelity Bond insurance?
A: You don't mention which bank you're using, but at this point, most lenders in the conforming space -- which for big-city co-ops is any loan up to $729,750 -- are going to adhere to Fannie Mae guidelines. That includes the requirement for Fidelity Bond Insurance, which protects the co-op from events like embezzlement -- it's protection against the board treasurer running to the Caymans with a bunch of money. So it's unlikely that this three-month Fidelity Bond Insurance requirement is something you can get around by simply switching from, say, Citi to Chase.
You can try going to what's called a "portfolio lender" -- a smaller regional bank that makes mortgage loans, and then, instead of reselling them, holds them in its portfolio. In the Northeast, M&T Bank is an example.
However, before you do that, I'd mention this problem to the seller. (You're probably not talking directly to the seller, so if you're using real estate agents, your agent can talk to the seller's agent, or you can have the conversation go from your attorney to the seller's attorney.)
The conversation should go something like this: "Look, I'd really like to buy your apartment. I've been approved for a loan by _____ {Insert the name of the big bank you're working with here}. But they have a Fidelity Bond Insurance requirement, and that traces back to Fannie Mae, so all the big lenders are going to have it. Can you please sit down and talk to your co-op board, as a shareholder, and point out that until they buy the insurance, no big bank is going to lend on their building? If Wells Fargo and Citi and Chase and Bank of America aren't going to write mortgages to buyers, your apartment, and the apartment of every board member, becomes really tough to sell. I know buying the insurance is expensive, but explain to them that not having it is worse."
In my experience, once the seller has this conversation with the board, the board usually caves and buys the insurance.
However, be warned that this whole process can take a couple of weeks -- the board members first have to research the situation and realize that the seller is right, and then have to buy the insurance -- so you'll have to keep working with your mortgage broker or loan officer to make sure they keep your mortgage commitment extended till this gets done.
Stay on top of it. My rule of thumb on this one would be to talk to your loan pro and the seller's side every day. A pain, I know, but I'm sure you'll end up with your dream apartment!
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