Fannie Mae/Freddie Mac recently released coordinated updates to their lending standards. If your Association does not comply with these standards, lenders may refuse to write conventional loans for units within your community. These standards are largely related to the Association’s reserve funding. As a result, your Association’s budget may need changes to allow conventional loans to fund.
Although Fannie Mae/Freddie Mac do not impose direct obligations on your Association, their requirements are the national standard. If your Association is not in compliance, your property may not qualify for conventional financing. Not qualifying for conventional financing can reduce financing options for prospective buyers, negatively impact property values, and limit marketability within the community. This article provides guidance to help your Association remain in compliance.
The update included changes to project eligibility standards and property insurance requirements. Broadly, the major changes to project eligibility are an increase in reserve funding requirements and changes in reserve study requirements. For property insurance, the update changes deductible requirements and reduces documentation to prove adequate coverage. This article will outline the updates in project eligibility standards and provide next steps for your Association.
Project Eligibility Standards Updates
There are four main changes to be aware of, with each discussed in more detail below:
- Increased replacement reserve funding requirements from 10% to 15% of assessment income starting January 4th, 2027.
- New and established projects with 10 or fewer units may waive project review effective immediately.
- There are no longer limits on the percentage of units permitted to be owned by investors effective immediately.
- If your Association plans to use a reserve study because you feel like the minimum reserve requirements pose a unique hardship on your community, starting August 3rd, 2026 you must follow the highest reserve allocation recommended by the reserve study.
Increased Replacement Reserve Requirements
Perhaps one of the most relevant updates is the increase in reserve funding requirements. Under the current standard, your Association’s annual budget must allocate 10% of budgeted assessment income to reserves for future major repairs and replacements. For all loan applications after January 4th, 2027, that minimum budget allocation increases to 15%.
It’s important to note that this is a budget test, not an account-balance test. Lenders look at how much your annual budget contributes to reserves each year, not the total amount sitting in your reserve account. An Association with a healthy reserve balance but a low annual contribution can still fail this standard of your budgeted assessment income to reserves.
To determine your current reserve allocation, divide your annual reserve contribution by your total budgeted income or assessments. If your reserves are currently at 15%, no change needs to be made, and your Association complies with the standard. If not, consider raising assessments or reducing operating expenses before January 4th, 2027. For options to increase assessments and raise funds for your association within legal limitations, contact your attorney for further guidance.
Expansion of Waiver of Project Review
Prior to these newly published updates, certain established condominium projects could qualify for a Limited Review. A Limited Review was a streamlined approval process that let buyers with larger down payments obtain financing without the lender examining the Association’s finances.
Under the new standards, the Limited Review process is being retired. Instead, eligible condominium projects with 10 or fewer units may qualify for a Waiver of Project Review, while larger projects generally require a Full Review.
If your Association previously qualified for the Limited Review process and you do not qualify for a waiver, your Association will now undergo the Full Review process. A Limited Review typically called for an appraisal, title report, flood determination, evidence the project was an established condominium, and basic insurance verification. The Full Review process is much more in depth. During a Full Review a lending company analyzes your:
- Master insurance coverage;
- Ownership concentration: number of owner-occupied units and investor-occupied units;
- Delinquency rates: percentage of homeowners who are late on monthly assessment payments or special assessments;
- Commercial usage percentage: whether any part of your property is being rented out for commercial purposes;
- Pending litigation;
- Deferred maintenance obligations;
- A budget review: ensuring your reserve funding is in compliance;
- An updated reserve study: demonstrate how the Association is planning for future repairs;
- And structural analysis: whether there is any structural deterioration or unsafe conditions.
Consult your attorney for assistance to ensure you have the required documents to be in compliance with a Full Review request.
Retirement of Investor Concentrated Units
Investor-owned units are the homes in your community that are owned by investors and are not owner-occupied. Under the previous standards, communities requiring Full Review generally could not have more than 50% of their units owned by investors. With the recent updates, that restriction has been removed. As a result, communities with 60%, 70%, or even higher levels of investor ownership may still qualify for conventional financing.
This is a significant change for many condominium associations. It recognizes that a strong and financially stable community can have a substantial number of rental units and still be a desirable place to live and invest. Rather than focusing solely on the percentage of investor-owned units, lenders can now consider the overall financial health and stability of the project when determining financing eligibility.
Enhanced Reserve Study Requirements
Some Associations have unique repair and replacement obligations that make a reserve study a better for their budget than following the minimum reserve requirement. That alternative is still permitted – with a catch. For loan applications dated on or after August 3, 2026, the Association’s budget must include the highest reserve allocation recommended in the reserve study. Associations relying on a reserve study may no longer rely on lower funding levels when the reserve study recommends a higher reserve allocation.
These changes ensure that the reserve study is no longer just a document on the shelf. If your Association uses that study to satisfy lenders, the HOA must actually follow the study’s recommendations. Importantly, this change goes into effect August 3rd, 2026, several months prior to the increased 15% reserve allocation requirement for loan applications dated on or after January 4, 2027. Associations relying on a reserve study in lieu of the minimum should review their budgets against the study’s highest recommended funding level now.
It is important to note that only Associations that are utilizing the reserve study instead of meeting the minimum reserve requirements are required to follow the highest reserve allocation recommended. Associations utilizing this standard must also update their reserve study at least every three years.
Next Steps for Your Association
- Determine your current reserve percentage and increase your minimum reserves to 15% before the January 4th deadline.
- Obtain an updated reserve study to determine how much your Association should be setting aside for future major repairs and replacements.
For additional information about the Fannie/Freddie updates, see the Fannie Mae Lender Letter: https://singlefamily.fanniemae.com/media/44986/display.
If your HOA needs legal help, our office is here to help with your general counsel questions. Call or message us online for a confidential legal assessment.
Sources
https://selling-guide.fanniemae.com/sel/b4-2.2-02/full-review-process
