FHA Fidelity Insurance Requirement
Property managers and board members have routinely been receiving “mortgagee questionnaires” from the lenders of potential purchasers, asking the association a variety of questions ranging from reserves, number of delinquent accounts, number of investor owners, and amount of casualty, liability, and fidelity insurance coverage. When filling out this form, many Ohio condominium associations have been asking our office if they possess sufficient fidelity insurance to comply with Federal Housing Administration ("FHA") requirements. Currently, FHA requires sufficient fidelity insurance to cover all of the money in an association’s reserve account, plus three (3) months worth of assessments. For many associations that have been planning and saving for reserves, this amount may be significant, so it is important to verify the amount in the association’s reserve accounts and determine the exact amount of the association’s current fidelity insurance coverage from the association’s insurance policy or agent.
FHA also requires that the association maintain this fidelity insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association. This includes property managers and bookkeepers. Thus, in addition to verifying the dollar amount of coverage, the board should also verify who is covered by the policy. Regardless of whether or not your association desires to be FHA eligible, Kaman & Cusimano strongly recommends that all associations have a Managing Agent Rider (MAR) attached to its fidelity insurance. This will help to ensure that the association’s assets are adequately protected.
For any potential purchasers to close on an FHA insured loan, the association must be able to demonstrate that it maintains this level of fidelity insurance. If the association’s fidelity insurance does not meet FHA requirements, the board must decide whether or not it should raise the association’s coverage, by balancing the increased premiums with the possibility of FHA insured financing.
It is very important to fill out the mortgagee questionnaires accurately and correctly to avoid any disputes or allegations of impropriety in the future. Again, the association must have enough fidelity insurance to cover all of the money in an association’s reserve account, plus three (3) months worth of assessments. If you have any additional questions regarding fidelity insurance, or if your association would like to apply to be on the FHA list of approved condominiums, please contact Kaman