What Are Fannie Mae Condo Guidelines?
Most home buyers finance their purchase, which means that their lender has to underwrite them as borrowers and the home as collateral. What many borrowers don’t realize is that most lenders underwrite according to guidelines set by the entity that they will sell the loan to on the secondary market. And when it comes to condominium units, that includes Fannie Mae.
Underwriting a condo unit isn’t like underwriting a single-family home. With a single-family home under Fannie Mae guidelines, the purchase of the asset is straightforward: the land and the structure(s) that sit on it. Assessing the value is simple and achieved using an appraisal.
For condominiums, it’s a little more complicated. A condo unit has four walls, yes, but those four walls connect to the walls of other units. Condo units are part of a condominium project—each with their own unique characteristics and with common spaces and shared amenities. The condition, quality, and design of the project may all impact the lender underwriting process, requiring extra steps that single-family homes simply don’t require.
That’s why Fannie Mae guidelines aren’t the same as what you can expect if you are purchasing a single-family home. Meeting the requirements under Fannie Mae guidelines for condo unit loans is more complex and nuanced and it is important to understand the basics contained in the Fannie Mae guidelines.
Why Is a Fannie Mae Approval Important, Anyway?
Let’s start with the fundamentals. Any loan that a lender intends to sell to the GSEs must meet specific requirements. Fannie Mae is one GSE—or Government Sponsored Entity—and meeting its specific requirements will impact your lender’s ability to sell your condo loan to Fannie Mae. This process is important to lenders because once a condo loan is warranted as eligible under the guidelines, that loan can be sold to Fannie Mae, allowing your lender to originate more loans.
Special Considerations for Condo Units
For condo loan borrowers, the process can be a bit frustrating. Why can’t the Fannie Mae guidelines simply evaluate the condition of the condo, forget about the rest, and move on with the process? It’s not quite that simple. Let’s look at some of the elements that are significant parts of Fannie Mae guidelines
- Financial Health of the Condominium Project. When Fannie Mae purchases the condo unit loan from the lender, it requires a detailed assessment that the finances of the overall condominium project meets its guidelines.
- Conditions Assessment. The condition of the structure(s) has become paramount to Fannie Mae in recent years. Condominium projects are required to demonstrate structural integrity.
- Attached/detached. While not always an issue for single-family homes, whether the condo is attached to or detached from other units, as well as the number of units in a project, will have an impact on the assessment process.
Limited vs. Full Reviews
The process for determining Fannie Mae eligibility under its guidelines is determined through a review process. There are two types of reviews: limited and full reviews. The type of review generally comes down to the specific details of the condominium project.
For example, are 90% or more of the units sold and owner-occupied? That would be one of the criteria for the condo project being treated as an “established project,” which might be eligible for a limited review.
Do the condo unit owners control the association? If so, this too is another criteria of an “established project.
There are numerous other factors in Fannie Mae guidelines that determine whether a condo loan is subject to a limited or full review. Both, however, require an analysis of numerous and varied data points about the condo project. The basic difference between the two:
- Limited reviews can only be performed on established condominium projects and are generally more “streamlined.”
- Full reviews are, as you might imagine from the name, more comprehensive. All new condominium projects are required to undergo a full review. In some cases, established condominium projects are as well, depending on multiple factors including finances, insurance, and the physical structure of the project.
HOA Factors That Might Go Into Review
Before you finance a condo unit, make sure you have information about the HOA or Homeowner’s Association. The HOA is made up of the unit owners and is responsible for creating and enforcing the rules of a condominium project and is run by a board of directors. The HOA collects fees to pay for common area maintenance as well as common amenities. How the HOA runs the condo project could have a major impact on your bottom line. A Fannie Mae eligibility review takes a deep dive into multiple aspects of the HOA.
What is the current budget of the association?
For example, what funds are necessary to meet the ongoing maintenance of the project? How much of that money goes towards reserves? What major improvements are on the horizon? An HOA that can’t fully fund itself can be a red flag.
Are there deed restrictions placed on the condo units in an HOA, which limit how property can be used? Do the bylaws include a right of first refusal? The answers to these questions can impact a condominium project’s ability to meet Fannie Mae guidelines.
Ineligibility Issues in Fannie Mae Guidelines
What are some conditions that automatically prohibit Fannie Mae eligibility? The following are some items that make a condominium project ineligible according to Fannie Mae guidelines:
- Is the condominium project more like a hotel than a condo? Is there a check-in desk, and are short stays allowed? If so, this impacts the project’s classification and its eligibility.
- Master insurance that does not cover the entire condominium project. If the condominium project is under-insured, this affects the ability to address major damage and repairs and could impact a unit owner’s ability to pay off their mortgage.
- Litigation against the HOA. Litigation that includes mishandling of funds, construction, structural or safety issues potentially prohibit Fannie Mae eligibility.
These are just a few of the complex requirements that must be analyzed on condo unit loans to meet Fannie Mae guidelines. Project Risk Evaluation Partners wants you to understand this important aspect of condo loan origination so that you are better educated on this complex process that is an integral component of securing a condo loan. Managing client risk is our business. Contact us to find out what you need to know.