Anna DeSimoneCondominium Guideline Changes

by Anna DeSimone**




In recent months, both Fannie Mae and Freddie Mac have revised their guidelines for condominiums. The changes published by the agencies are outlined below.

Fannie Mae – Key Points

Summary of Announcement FNMA 08-34 Amendments to Condominium Unit Mortgage Requirements

Project Eligibility Review Service (PERS) is a project-acceptance review service for FNMA seller/servicers for new or newly-converted and established condo projects. This fee-based service requires lenders to submit by email the complete project package to FNMA for approval. PERS-approved projects are posted on

Spot Loans qualifying under the Limited Review* process:

  • Loans originated through the ordinary course of business;
  • The lender has not targeted the project with specific marketing efforts, or named a preferred lender by the project’s developer or condo association.

* Limited reviews are only allowed on established projects that meet the following conditions: 90% of units have been conveyed; project is 100% complete and not subject to additional phasing; HOA controlled by unit owners

Legal Document Review

  • For new and newly-converted 5+ condo projects, lenders are required to represent and warrant the legal documents; attorney review is optional;
  • For all established projects, no lender rep and warranty of the project’s legal documents are required;
  • New or established 2-4 unit projects do not need lender rep or legal review; and,
  • All condo projects submitted to PERS require attorney review.

Ineligible Project Types include the following characteristics:

  • Greater than 20% of space is used for commercial purposes;
  • More than 10% of units are owned by a single entity; and/or,
  • Seller sale or financing incentives on new condo projects that do not meet specific FNMA eligibility policies.

Florida Condominiums – special rules:

  • PERS approval must be obtained for all new and newly-converted projects; no other project review types can be used;
  • Reduced LTV ratios for established projects eligible for Limited Review, FHA-approved Project review or Condo Project Manager (CPM)-Expedited Review; and,
  • LTV ratios remain unchanged for condo projects approved using the Lender Full Review Process and PERS.

Miscellaneous Updates

  • Master or Blanket insurance policy must be maintained by the condo association only for the project in which the individual condo will be financed.
  • Pre-Sale Requirement has been increased to 70% from 51% for new and newly-converted attached condo projects using Lender Full Review. This change does not apply to projects entered into CPM.
  • Delinquent HOA dues policy for CPM and Lender Full Review: no more than 15% of the total units in the project can be 30 or more days past due for both new and established attached condo projects.
  • Fidelity Insurance is required for both new and established projects with over 20 units. This applies to all project review types including Limited Review.
  • A walls-in/HO-6 insurance policy which covers at least 20% of the condo unit’s appraised value with a 5% deductible, is required for all condo projects including 2-4 unit projects. This policy is required when the master policy does not cover unit interior improvements and betterment.
  • Co-op Projects: Max commercial space is 20% of the project’s total square footage. Previous income limitation policy has been eliminated.
  • REO Units for sale are now reflected as owner-occupied units for the purpose of owner-occupancy ratio requirements. 

Freddie Mac – Key Points

Special Warranties for Condominiums Seller/Servicer Guide Chapter 42 effective July 1, 2009

Service Special Characteristic Codes (SCC) are required for mortgages with settlement dates of July 1, 2009 or later under the Streamlined Review option or approved through Fannie Mae’s Project Eligibility Review Service (PERS).

Established Condominium Projects

  • The project is fully complete;
  • Pre-sale Requirement is 90%;
  • Unit owners control the HOA;
  • There are no Manufactured Homes in the project;
  • Project Operating Budget of 10% for replacement reserves for capital expenditures and deferred maintenance;
  • Delinquent Assessments – Max 15% of total # of units in the project can be 30 days or more delinquent;
  • Owner-Occupancy Requirements – No requirement if a primary residence or 2nd home; If Investment property, at least 51% of total units must be owner occupied; and,
  • Seller Warranties in Guide Section 42.11 and 42.2 must be made.

New Condo Projects

  • Subject legal phase is "substantially complete" and Certificate of Occupancy for the subject’s legal phase should be obtained;
  • Owner-Occupancy requirement: 70% of total # of units in the project must be primary residence or 2nd home. If this condition cannot be met both the following criteria must be met:
    • At least 70% of the total number or units in the subject legal phase must be the borrower’s primary residence or 2nd home; and,
    • At least 70% of the sum of the total number of units in the subject phase plus the total number of units in all prior legal phases must be the borrower’s primary residence or 2nd home.
  • Project Operating Budget and Delinquent Assessment, same as Established Condo Project;
  • There are no Manufactured Homes in the project;
  • Florida New and Newly-Converted condominium units will only be eligible for sale to Freddie Mac if the condominium project is approved through the Fannie Mae PERS process; and,
  • Seller Warranties in Guide Section 42.11 and 42.2 must be made.

Streamline Condo Review Eligibility

  • Condo must be in an established project;
  • Origination must be on a spot loan basis and not as part of multiple originations by same Seller in the same project;
  • Condo cannot be a Manufactured Home;
  • Maximum LTV Ratios apply for occupancy type;
  • Lower LTV ratios apply to attached Condo projects in Florida;
  • Cannot be used for investment properties in detached condo projects;
  • 2-4 Unit condo projects must be established projects;
  • Seller Warranties in Guide Section 42.2 must be made; and,
  • Seller Warranties in Section 42.11 do not have to be made.

Two new Project types have been introduced:

Live-Work Condominium Projects

  • Project documents allow commercial use;
  • Units are designed for residential use with minimal commercial traffic, such as a primary business operated from a primary business unit, and,
  • Project can be underwritten as Established or New, as applicable.

Mixed-use Condominium Projects

  • Typically located in city centers with limited retail / commercial use on the ground floor and residential units on the upper floors;
  • Commercial entity cannot be the manager of the entire project;
  • Project cannot include a hotel;
  • Presale and Owner-Occupancy requirements apply to the residential units only;
  • Project documents must allow commercial use, address voting rights, assessments between all owner types, and identify common elements that are reserved for either commercial or residential use;
  • Residential unit owners are not responsible for the expenses of the commercial use units;
  • Operating reserves of at least 3 months of expenses;
  • Project management must not manage a rental program for residential unit owners; and,
  • Project can be underwritten as Established or New, as applicable.

Reciprocal Project Reviews
Freddie Mac will purchase Mortgages secured by 1-unit dwellings in condo projects that have been approved by FNMA and FHA.

  • FNMA Final Project Approvals, Conditional Final Project Acceptance or Expedited CPM reviews and FHA approvals noted on the HUD website must not be expired;
  • Copies of Fannie Mae or FHA approved status must be in file;
  • Seller must make all necessary Freddie Mac Warranties; and,
  • Maximum LTV Ratios apply to Florida condo projects:
    • 75% or less for Primary residence,
    • 70% or less for a 2nd home,
    • Investment properties not allowed.

Ineligible Condominium Projects

  • Projects sold with excessive Seller contributions Projects with excessive single investor concentration;
  • Projects with fractured interest;
  • Continuing Care Retirement Communities;
  • Condominium Projects that are ineligible for delivery to or have been rejected by Fannie Mae;
  • Hotel / Resort Projects;
  • Projects with multi-dwelling units;
  • Projects with commercial space greater than 20%;
  • Projects with more than 20% of income from sources other than dues and assessments; and,
  • Houseboat projects.

**Anna DeSimone is President of Bankers Advisory, Inc., a Massachusetts-based audit and consulting company specializing in mortgage banking compliance and quality control.

Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution’s business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization’s programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions.

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