Insurance coverage must equal the lesser of
100% of the insurable value of the improvements, as established by the property insurer; or
the UPB of the mortgage loan (or, if the mortgage loan is a second lien mortgage loan, the combined UPB of the first lien and second lien mortgage loans), as long as the UPB of the mortgage loan (or the combined UPBs) equals at least the minimum amount required to compensate for damage or loss on a replacement cost basis, which is usually 80% of the insurable value of the improvements.
The servicer must follow the procedures in Determining Property Insurance Coverage Amounts in F-1-02, Escrow, Taxes, Assessments, and Insurance for detailed steps to determine the amount of insurance Fannie Mae requires.
For more information please see: B-2-02, Property Insurance Requirements for Mortgage Loans Secured by a One- to Four-Unit Property.