The Catch-22 Impact Of New Fannie Mae (FNMA) Condominium Lending Regulations

by Rich Vetstein on July 1, 2009 · 51 comments

in Condominium Law, Fannie Mae, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

Here is a brief overview of the Fannie Mae condo guideline changes:

  • For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%.  This is the real Catch-22.  Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
  • No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
  • Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
  • Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
  • No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
  • No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
  • The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
  • No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
  • Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.

According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis.  Therefore, these guidelines may not apply to all condo projects.

Click here for the guidelines.

What’s the impact of the changes?FNMA condominium guidelines

Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.

Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.

Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.

Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.

Update:  Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at

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  • Timely article . I am thankful for the insight . Does anyone know where
    my assistant would be able to locate a sample WI WB-24 example to fill
    in ?

  • Joe Dicato

    Hi Richard,
    I am under contract with selling my condo (34 units total in complex) and the association is at 23% delinquent. I myself am NOT one of the delinquent accounts. What are my options to still be able to sell to the contracted buyer? Do I have to have the condo association and/or property management company so the legal recourse to show money will be in house at some point? is there anything i can do as the seller by paying a fee or even throwing money towards the delinquencies? Am I stuck hostage until a cash buyer is available?
    I am in a time sensitive matter as the closing is scheduled for the end of this month (Dec 2014). there has to be something that can happen so i am not to lose out on the sale of my condo and the new purchase of my relocated home.



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  • Ajkamon

    Can an attorney appear in court on behalf of a landlord without landlord being present, and then enter into an agreement with tenant in order to settle matter?

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  • I am a Real Estate Listing Agent for one condominium in a building with 16 units built in 2005. The developer still owns 3 of the units. Does this qualify for an exemption from the “no more than 10% owner” rule in that 70% of the other units are “sold” in a new construction development? If so, would including a position paper be the best way to submit any loan applications?

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  • D

    We are trying to sell a condo in Rockville, MD. We have a very qualified buyer with 20% down and who makes much more than enough to afford the mortgage, but now we are running in to loan problems because of owner occupancy vs rent-to-own. So my question is how can they get the % up if no one will give the buyers loans? Are we stuck in this condo until the rules change? This unit is an MPDU (Moderatley Priced Dwelling Unit) as well so the price is much much lower than the other units…

  • tes

    i am trying to buy a condo in atlanta i start the procces in november now thye said i need ho6 policy i am willing to buy that the policy they have toled me the last miniut befoe closing. saying that shoud incloud in master policy.i haven not heard any hoa has that.finally i told by my loan officer BOA have aproblem to procces two insuranc policy. can you please help me with problem

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  • Anthony

    Hi Richard,
    I just got an offer accepted on a little condo in San Diego. I have to go with a homepath loan due to lack of available money down. The complex is not FHA approved. I do not know very much about the loans and procedures. Can you provide any advice on what type of research I should do on my own to protect myself as a buyer? Thanks for your help!

    • Anthony, sorry but ethically I cannot provide legal advice through the blog. You should contact a real estate attorney out in San Diego to help you out. Let me know if you need a recommendation.


  • Mike U.

    So if the building is more than 20% non-residential, is there no need for the 10% reserve fund…since it will be ineligible for the funding programs anyway?

  • Chris, I used to live at one of those condominium complexes while attending Miami University in Oxford, OH. Were parents purchasing condo units for their children, then selling them once the kid graduated? Weren’t they really investment properties for the parents anyways?


  • Richard,

    I own a company that manages a condominium community in Athens Ohio called University Commons. The residents are Ohio University students and the owners are current or previous residents parents. There are 132 units and we have an on-site office to manage the property. The association currently has 0% delinquency and good solid reserves. There have been no foreclosures or short sales. Although the property is now 18 years old, it is in excellent condition and still very popular with the students. Up until this year University Commons has been an FHA approved property, but now it is no longer approved with HUD stopping all “Kiddy Condo” FHA loans. This will eventually turn University Commons into an entirely investor owned property. This is an example of how the system is failing to reward and even punishes banks, community associations, management companies and individuals that do the right thing.

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  • Robert Robinson

    I am considering buying a condominium that is 100% owned by a builder.
    I have excellent credit and more than 20% down payment. The builder has approximately 30% more homes to build and sell to complete the entire project.
    Currently, 80% of the model homes were purchased through FHA. Will the builder
    be able to continue to offer FHA loans?
    Will financing be harder and more expensive If I do not commit to the new FHA regulations untl after December 6, 2009?

  • Mike Tartamella

    Stephen, I had a similar question and was able to reach someone at FHA. The 10% is based on the yearly income. You basically need at least 10% of that yearly income in the reserves account. Should not be a problem if your association has any sort of account with some money in it. In addition, your reserves should also be able to cover your deductable for the master insurance.

    Example (as it was explained to me): $17,000 income (condo fees, investments) x 10% = $1,700 minimum needed in reserve account

  • Daniel Routhier

    I am on the board of a condo in Florida. Is it possible for our building to be proactive and get our building certified by Fannie Mae? After reading your article I tried contacting Fannie Mae, they refered me to approved lenders. I have contacted several approved lenders and after spending a great deal of time, have made no progress.

  • Stephen H. Deutsch

    Does the 10% of its budgeted income requirement designated in a capital reserve fund for replacement reserves mean a 10% contribution each year? Could this apply even if the reserve has reach a level of 5 times the budgeted income? 100 times?

  • Richard Brown

    I am the president of a fully occupied 12 unit condominium built in 1971 in another state. We have one owner who owns two units remodeled into one dwelling for personal use only. We also have no reserve fund as we pay all over budget expenses by special assessments. Will a prospective unit buyer face Fannie Mae related loan application problems?

  • Mani

    I was curious if one or more of the above listed FNMA condo rules apply to the HOA associated with town homes, where the HOA dues range from $35 to $55 per month.

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  • Rhett

    I own a condo in Chicago in a mixed-use 3 story building. Each floor is one unit, ground floor is retail space. Commercial is therefore 33%. We don’t have 20% equity so local banks won’t refinance us. We are trying to sell the unit but Fannie Mae/Freddie Mac won’t underwrite it, we’ve had a buyer looking to put 20% down and was denied. They went to many, many banks and none would touch it. Can we get our condo or building approved by FHA and send them to banks that will do FHA loans? Very scared that this makes our unit unsellable/worth $0. Should we foreclose if the government-backed FM/FM says it is worth nothing even if appraised at $380k? Very distraught we put a lot of money into it.

  • Irina

    If the condo unit you want to buy is FNMA REO, and it says that the property is approved for Homepath Loan and is listed on Homepath website, can I buy it with a Homepath loan? I know for sure that the condo building doesnt qualify going by above specification, but for some reason it is on their Homepath approved list and so are many condos that don’t seem like they would qualify.
    Does different criteria apply to FNMA owed REOs? Can I safely put an offer on the property and not worry that the condo won’t get approved?

  • Sara

    We have a qualified buyer for our condo. The building has two commercial units on the first floor and four condo units on the top floor. We’re at 37% commercial. Our buyer can’t get any loan based on the commercial space. We have to sell. 800 sqft condo and we have two small children. We’re in a suburb of Chicago. Please let me know if we have any options.

  • Bill

    I’m in the process of trying to buy a condo/condex. It’s basically a duplex, and each unit is owned seprately. I’m renting one side now, and am trying to buy it from the landlord. The other unit is owner occupied. I’m having a hard time finding a lender. Do you know if this type of property is FNMA approved?

  • Wilhemina

    We are in another state and our buyer’s loan was denied due to the management company not having 10% in reserves. Not only was it a painful and stressful process, it ended up being denied in the end. Where can the buyers now go to find a loan and how do they know if the bank will or will not require all the FNMA requirements? 🙁

    • Wilhemina, the best bet is for the buyers to go to a small local bank which doesn’t sell their loan to Wall St., and is therefore, not bound by the FNMA regulations. Good luck!

    • Wilhemina, the best bet for your buyers is to go to a small local bank which doesn’t sell their mortgages on the secondary mortgage market.

  • Tmalone

    Dear author.
    My wife and I found a worthy buyer for our condo. She used Fannie mae. She received the apprval letter from them so we could close. The day before closing we received a call letting us know of an issue with fidelity bonds or known as employee dishonesty bonds.
    No one saw this coming.
    We are now two weeks past the date and are making little progress as
    to how to solve this. Our condo would need to raise their bond coverage, or this will not go through.
    To your knowledge, is there anything I can do to either help solve this or get around it in regards to Fannie? Can an exemption be filed?
    Thank you in advance.

    • Thomas, raising the bond coverage should not be a big deal–it’s a matter of increasing the coverage (and paying more however). Perhaps you should intervene with the insurance agent and the trustees. The time it will take to get the coverage in place will be less than the time it will take to process an exemption. Good luck.

      Richard D. Vetstein, Esq.

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  • John

    Here is another catch 22 with the new guidelines. I am in a 3 unit condo association in Harvard square in Cambridge, MA.The guideline stating no one owner can own more than 10% of the units does not jive with my HOA. My HOA consists of 3 units, I own one and the original developer owns the other two since 2005. He rents the apartments for well above his mortgage payment. Now I am trying to refinance and can’t find a lender that will loan outside of the new guidelines. Any suggestions to get around this? Finding a local bank that will keep the the loan in their portfolio looks like the only way???

    • John, I think going to a smaller bank is your best best. Otherwise, you could apply for an exemption from the regulations through your lender. Probably would be a royal pain in the you-know-what. The argument is that the HOA is so small that the FNMA regulations were not intended to cover it, especially given the likely situation of the developer retaining ownership of a unit (or 2) in a 3 unit project. As long as the condo is in good financial health (sound reserves, solid budget, no unpaid assessments, etc.), you could make a decent case. Best of luck!


  • My daughter is living in Germantown,Md with her husband of one year. She recently lost her job with a Fortune500 Co., a victim of this recession. She has signed papers to sell her condo. in Pilly to a very capable party[high income and approved for over 2 months for the loan] Now one week from closing this Fannie Mae Condo. Lending Regulation has thrown a wrench in the works. The unit is a totally renovated building with 5 units, one being occupied by the contractor who renovated the building. This sale is now questionable, what can she do? Also, with no job, no income, and no savings, the she has no way of maintaining the condo. This outcome could be devistating. It puzzles me that a sale pending to a very good buyer can’t be consumated. Please help.

    • Dennis, I sympathize with your daughter’s plight. This is exactly the Catch-22 that I wrote about in my post. I assume that your daughter is running into the 70% pre-sold/sold requirement as well as the developer occupied unit rule. Unfortunately, she is at the mercy of the buyer’s bank/mortgage company. Perhaps the buyer could obtain financing from a smaller bank who is not hand-cuffed by the FNMA requirements (that is, they don’t sell their mortgages on the secondary market). I hope it works out!

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