Fannie Mae Condominium Approval Requirements

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1 Fannie Mae Condominium Approval Requirements Since the mortgage crises began in late 2006, would-be homeowners have faced stricter mortgage application guidelines, lengthy processing times, and complicated regulations that are outcomes of efforts to stabilize the lending industry. In particular, Fannie Mae has stiffened its guidelines for potential condominium developers, investors and individual buyers. Fannie Mae purchases or securitizes mortgage loans secured by units in a condominium project that meets Fannie Mae s eligibility requirements 1. Condominium Definition A condominium is a real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas. A condominium unit is a one (1) unit dwelling located in a condominium project. The required minimum square footage for condominiums is 600 square feet. The condominium unit must include a kitchen serviced by full-sized appliances, and cannot include any form of built-in sleeping conditions. Condominium Project Types Fannie Mae has established definitions for different condominium project types: Established Project An established project is a project in which 90% or more of the total units have been conveyed to the unit purchasers, the project is complete (including all units and common elements), the project is not subject to additional phasing or annexation and the control of the homeowners association has been turned over to the unit owners. New Project A new project is defined as a project in which less than 90% of the total units have been conveyed to the unit purchasers. New projects also include projects that are not fully complete, (such as proposed construction, new construction, or the proposed or incomplete conversion of an existing building to a condominium), projects that are newly converted, projects that are subject to additional phasing or annexation and projects in which the control of the homeowners association has not been turned over to the unit owners to 4-Unit Project For 2-4 unit condominium projects, all but one unit in the project must have been conveyed to owner-occupant principal residence purchasers or second home purchasers. This pre-sale requirement can include the subject unit. Note: To determine if your project is eligible and which project criteria it meets see the Project Eligibility and Ineligible Projects checklists found on pages 3-4 below. 1 Fannie Mae will also purchase or securitize loans secured by co-op and planned unit development (PUD) projects and manufactured housing projects. Information regarding Fannie Mae financing for these project types, however, is not included in this summary. Please also note that Fannie Mae has special conditions and requirements for condo projects in Florida that are not covered in this summary 2 For lender full reviews only the pre-sale requirements for new and newly converted condominium projects is seventy percent (70%). Seventy percent (70%) must be conveyed or under ratified contract to owner occupied or second home purchasers. Non-owner occupied units may not be included towards pre-sale. 1

2 Single Entity Ownership No single entity (the same individual, investor group, partnership, or corporation) may own more than 10% of the total units. Owner-Occupancy Ratio Requirements Established condominiums must have an owner-occupancy ratio of at least 51% (i.e., more than 51% of the units in the complex are owner-occupied) at the time the loan is originated. REO units (bank owned units) that are for sale (not rented) are included as owner-occupied units in the owner-occupancy ratio. In condominium projects with two to four units, a buyer may purchase only one unit. Appraisals and Down Payments A minimum of two similar units in the condominium complex must be appraised as marketable, and buyers must make down payments of between 10 and 25 percent in order to qualify for Fannie Maebacked financing. For owner-occupied units, the loan-to-value (LTV) ratio can be no greater than 90 percent for a primary residence. If the unit is a second home, the LTV can be no more than 75 percent. Appraisals of individual condo units are to be completed on the Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073 (Freddie Mac Form 465). Condominium projects that consist solely of detached dwellings may utilize the Uniform Residential Appraisal Report (Fannie Mae Form 1004; Freddie Mac Form 70) in lieu of the Individual Condominium Unit Appraisal Report. 3 Delinquent Assessments No more than 15% of the total units can be 30 days or more past due on the payment of their condominium association fee payments. Reserve Requirement The budget must provide for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10% of the budget). Insurance Blanket Insurance The condo association must have master, blanket insurance in place, which covers the complex outside the walls of individual units. This insurance must provide 100 percent replacement coverage. A blanket policy that covers multiple unaffiliated condominium associations is not permitted. The association s master insurance policy must include replacement of improvements and betterment coverage to cover any improvements that a borrower (unit owner) makes to the unit. Self-Insurance A self-insurance arrangement is not permitted. Hazard Insurance for Units The borrower (unit owner) must obtain a walls in coverage policy (commonly referred to as an HO-6 policy), covering personal property, personal liability, and the physical unit from the studs in, unless the lender can document that the association s master policy provides the same interior unit coverage. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.the HO-6 policy must provide coverage in an amount no less than 20% of the unit s appraised value, with a 5% 3 When the Uniform Residential Appraisal Report is utilized for a condominium project consisting solely of detached dwellings, the appraiser must include an adequate description of the project and information about the homeowners association fees and the quality of the project maintenance. 2

3 deductible. Fidelity Insurance Fidelity bond/fidelity insurance is required for all condominiums with more than 20 units. This requirement applies to new and established condo projects. Non-Residential Purpose Any commercial space in a condominium project should be compatible with the overall residential nature of the project. No more than 20% of the total space may be used for nonresidential purposes. Review of Projects Legal Documents Documents required for Fannie Mae approval include condo bylaws, a master deed, a two-year budget, and evidence that no more than 20 percent of the property is for non-residential use. Certain condominium projects require review by an attorney to confirm that the association s legal documents (Declaration/By-Laws) comply with FNMA s legal requirements. In this regard, it is not uncommon for a prospective purchaser s lender to submit a questionnaire to the association for completion. Eligibility Criteria The first step in arranging Fannie Mae financing for your condo project is to determine if your project is acceptable to Fannie Mae. Established Project According to Fannie Mae guidelines, all of the following four criteria must be met in order for a condo project an established project; otherwise, it is considered to be a new project: 1. At least 90% of the total units in the project have been conveyed to the unit purchasers; 2. the project is 100% complete, including all units and the common elements; 3. the project is not subject to additional phasing or annexation; and 4. control of the homeowner s association has been turned over to the unit owners. New Project If your condo project does not meet all four of the criteria of established projects [above] or if it meets any of the following standards, Fannie Mae considers your project a new project : 1. Fewer than 90% of the total units in the project have been sold to the unit purchasers; 2. the project is not fully completed, such as proposed construction, new construction, or the proposed or incomplete conversion of an existing building to a condo; 3. the project is newly converted; or 4. the project is subject to additional phasing or annexation. Two- to four-unit project If your condo project consist of two- to four-units, Fannie Mae has determined that all four of the following eligibility requirements must also be met: 1. No single entity may own more than one unit within the project; 2. all units, common elements, and facilities within the project, including those that are owned by any master association, must be 100% complete; 3. all but one unit in the project must have been conveyed to owner-occupant principal residence or second-home purchasers; and 4. the units in the project must be owned in fee simple or leasehold, and the unit owners must be the sole owners of, and have rights to the use of, the project s facilities, common elements, and limited common element. 3

4 Ineligible Project Types Fannie Mae will not purchase or securitize mortgages that are secured by units in certain types of condo projects, regardless of the characteristics of the unit mortgage. Ineligible project types Your condo project not eligible for Fannie Mae financing If any of the following boxes can be checked. Projects that are managed and operated as a hotel or motel; hotel or motel conversions; or projects with names that include "hotel" or "motel". Projects that include registration services and offer rental of units on a daily basis. Projects that restrict the owner's ability to occupy the unit. Projects with mandatory renting pooling agreements that require unit owners to either rent their units or give a management firm control over the occupancy of the units. 4 Projects with non-incidental business operations owned or operated by the homeowners' association, such as, but not limited to, a restaurant, spa, or health club. Investment securities - i.e., projects that have documents on files with the Securities and Exchange Commission, or projects where unit ownership is characterized or promoted as an investment opportunity. Common interest apartments or community apartment projects or projects or buildings that are owned by several owners as tenants-in-common or by a homeowners' association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building. Timeshare or segmented ownership projects. New projects where the seller is offering sale/financing structures in excess of Fannie Mae's eligibility policies for individual mortgage loans. These excessive structures include, but are not limited to, builder/developer contributions, sales concessions, HOA or principal/interest payment abatements, and/or contributions not disclosed on the HUD-1 settlement statement. Projects where more than 20% of the total space is for nonresidential purposes. Projects where a single entity owns more than 10% of the total units in the project. 5 Multi-dwelling unit condos - i.e., projects that permit an owner to hold title to more than one unit, with ownership of all of his or her owned units evidenced by a single deed and financed by a single mortgage. Any condo project for which the homeowners' association is named as a party to pending litigation, or for which the sponsor or developer is named as a party to pending litigation, that relates to the safety, structural soundness, habitability, or functional use of the project. 4 These formal agreements between the developer, homeowners' association and/or the individual unit owners obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis. In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such restrictions. In return, the unit owner receives a share of the revenue generated from the rental of the unit. 5 Units owned by the developer/sponsor that are currently subject to any lease arrangement, which may or may not contain a provision allowing for the future purchase of the unit (including, but not limited to, lease-purchase or lease-to-own agreements must be included in the calculation, whereas units owned by the developer/sponsor that are vacant and are actively being marketed are not included in the calculation. 4

5 Lender Review Information Project Standards Overview Project Type Project Review Methods Condominium Limited Review Lender Full Review Condo Project Manager (CPM ) Expedited Review Fannie Mae Review: Project Eligibility Review Service (PERS) For geographic-specific condo project review requirements, see B , Geographic-Specific Condo Project Considerations (09/24/2013) Sources of project information include, but are not limited to, appraisers, homeowners associations, management companies, real estate brokers, and project developers. Lenders are responsible for the accuracy of any information obtained from these sources. Appraisers must provide accurate descriptions of projects and include any characteristics that may be an indication that the project is ineligible. General Warranty of Project Eligibility When Lender deliver mortgages secured by an individual unit in a project that was reviewed under: The Limited Review process for established condo projects; The Lender Full Review process for condo projects; The Type E, Type F, or Type T PUD reviews; or The Type 1 co-op project type. Lenders deliver mortgages secured by an individual condo in a project that was reviewed under: The CPM Expedited Review process. Then Lenders represent and warrant that: The project was reviewed within the three months that preceded the date of the note for that unit to determine the project met the required eligibility criteria, and They are not aware of any changes in the circumstances since the lender s review of the project that would result in the project not satisfying Fannie Mae s eligibility criteria. Lenders represent and warrant that: The project has a valid, unexpired CPM Lender certification as of the date of the note, a copy of which is retained in the individual loan file; and They are not aware of any changes in circumstances since the project information was submitted to CPM that would result in the project not satisfying Fannie Mae s eligibility criteria. 5

6 Lenders deliver mortgages secured by an individual condo unit in a project that was reviewed under: The Fannie Mae PERS process (or project acceptance). Lenders represent and warrant that: The project has a valid, unexpired Fannie Mae Final Approval as of the date of the note; and The individual loan file contains a copy of the approved list that shows the name of the project and the expiration date. Lenders that submit and receive a Final Project Approval for a given project using PERS must provide all warranties as required by the Final Project Approval letter the lender receives from Fannie Mae. 6