Fannie Mae Condo Financing and Reserves

Condos which are being financed   by Fannie Mae are subject to not only borrower qualification, but   also condominium association approval by the lender. The lender must   determine the association’s soundness by performing a condominium review of   the project.  There are two types of condo reviews; a full condo review and   a limited condo   review. The determination on when one review is used over the   other rests primarily on occupancy type and down payment. If the buyer is   purchasing a primary residence and is putting less than 25% down, or the   buyer is purchasing a second home and is putting less than 30% down, or the   buyer is purchasing an investment property, the purchase is subject to a full   condominium review. On the flip side, if the buyer is purchasing a primary  residence with at least 25% down or a second home with at least 30% down, the   purchase will be subject to a limited condo review. One of the biggest   differences in the two types of reviews is the lender’s responsibility to   analyze the Association’s budget and to see if it is setting aside sufficient   reserves for future replacements – in a full condo review, this is required,   in a limited condo review, this is not required.

When determining if reserves are sufficient, the lender must review the HOA   projected budget to determine that it:

• is adequate (i.e., it        includes allocations for line items pertinent to the type of condo        project), and
• provides for the funding of        replacement reserves for capital expenditures and deferred maintenance        that is at least 10% of the budget.

How is the 10%   reserve allocation in the budget calculated?
To determine whether the association has a minimum annual budgeted   replacement reserve allocation of 10%, divide the annual budgeted replacement   reserve allocation by the association’s annual budgeted assessment income

Lenders are permitted to use a reserve study if the association does not   budget replacement reserves of 10%, but must meet the following   criteria:

• The lender obtains a copy of        an acceptable reserve study and retains the study and the lender’s        analysis of the study in the project approval file;
• The study demonstrates that        the project has adequate funded reserves that provide financial        protection for the project equivalent to Fannie Mae’s standard reserve        requirements;
• The study demonstrates that        the project’s funded reserves meet or exceed the recommendation made in        the study; and
• The study meets Fannie Mae’s        requirements for replacement reserve studies listed in the Fannie Mae        Selling Guide.