If you are buying or refinancing a condominium unit in California and your loan is being backed by Freddie Mac, the development must have earthquake insurance or else you will pay a premium. Apparently, this Freddie Mac rule has been around since 1996. I have been doing loans since 2001 and I recently learned of this requirement (the hard way) a week ago. The biggest reason it has not come up is because Freddie Mac does not back as many loans as Fannie Mae, so naturally the opportunity for the issue to arise would not have come up as often. Freddie Mac is more flexible in its qualifying ratio requirement (will go up to 55% as opposed to Fannie Mae’s 50%), so for certain people, a Freddie Mac-backed loan is the only option.
If the HOA has earthquake insurance, then no problem; we just need to provide proof. If it does not have earthquake insurance, then Freddie Mac will still lend, but will charge a 1.0% premium for doing the loan. This, in conjunction with other “risk-based pricing hits” for condos, the down payment and closing costs, can be a shock (for instance, that 1% on a $300,000 loan is $3,000 you may not have expected to pay).
For my particular client, we made it right. I took a hit by crediting some of the premium and the seller covered the remainder. But I know for a fact this will not come up again as a surprise for me or my clients because I will be able to give them and their real estate agent a “heads up” about the requirement.
