Condo financing: What you need to know

If you’re buying a condo, or if you’re planning to sell one, it’s important to remain vigilant. Unfortunately, condo associations are often busy, and things can fall through the cracks, which can end up disrupting the buy/sell process.

Table of Contents:

What does “Fannie Mae approved condo” mean?

Fannie Mae and Freddie Mac (federal enterprises which set the rules for 30-year, 20-year and 15-year fixed-rate loans) have specific requirements for condo loans. A “Fannie Mae approved condo” means the condo in questions meets or exceeds those requirements, and the condo is eligible for federal financing.

As of 2019, the Fannie Mae loan limit for condos is $484,350 — at least, in most parts of the country. (Click here to check the max in your area.) A lot of jumbo money sources follow Fannie Mae rules for condos, so it pays to know these basic facts on condo financing.

Read Accunet’s 3 Must-Know Tips for Buying a Condo to learn more.

What if I’m not financing my condo?

Technically, you don’t need to meet Fannie Mae requirements if you’re not financing. But even if you’re not financing your condo, it’s still important to keep your condo project Fannie Mae-compatible. Why? Well, when you sell your condo, odds are your buyer will want a  30-year fixed-rate loan (the most popular loan in America), and your condo will need to match Fannie/Freddie guidelines for the sale to close.

Is my condo Fannie Mae-approved?

Well, that depends. Fannie Mae has two different types of approval: Limited Review Approval, and Full Review Approval.

The type of approval you receive is dependent on a few different factors, and how your condo holds up in the review process. (Click here to find out which unit type your condo is, and read the official Fannie Mae condo review requirements.)

Factors impacting your review type:

  • Whether your condo is a primary residence or a second home
  • Condo location
  • Whether your condo is attached or detached
  • LTV (Loan-to-Value ratio). Basically, how much of the condo’s total value will be paid off using the first mortgage line.
  • CLTV (Combined Loan-to-Value ratio). This takes into account all your mortgage lines — not just your first.
  • HCLTV (High Combined Loan-to-Value ration). The HCLTV inclues all the credit you’re using, and all the available credit you could use if you wanted to.

Usually, these factors will determine which review your condo needs to go through for Fannie Mae approval.

The 2 types of condo approvals: Full vs. Limited

This next section summarizes the key elements of each review type; if you want the actual granular details straight from Fannie Mae, click here. A major factor in differentiating full and limited reviews is whether or not your condo is an “established project”:

What is an established project?

  • At least 90% of units are sold and closed, AND
  • The project is 100% complete including all units and common areas, the project is not subject to additional phasing, AND
  • Control of the HOA (homeowners association) has been turned over to the unit owners.

Need help? Don’t suffer through the details alone! Contact Accunet Mortgage for step-by-step guidance on financing your condo through Fannie Mae.

Limited condo reviews

Limited condo reviews are a streamlined review process for lower-risk loans. Condos with limited reviews are usually way more likely to be approved than those submitting full reviews. Luckily, most condo purchases and refinances fit into this category.

A condo fits into the limited review category IF:

  • The condo is an established project, AND
  • The buyer/owner will occupy the unit as a primary residence or second/vacation home, AND
  • The buyer/owner is putting at least 10% down (or has 10% equity on a refi)

Here’s a link to Fannie Mae’s limited condo review questionnaire with the actual details of the info the condo HOA will be asked to provide.

Full condo reviews

Full condo reviews are much more intensive than limited reviews.

The following circumstances require a lender to perform a full review of the condo project if the loan will be sold to Fannie Mae or Freddie Mac, because these circumstances are viewed as being more risky:

  • The buyer/owner has or will have less than 10% equity, OR
  • The condo will or is being used as a rental property (regardless of down payment amount), OR
  • The project is not an established project. For a non-established project to be eligible for Fannie Mae financing:
    • all of the common areas must be complete, AND
    • all of the units in the project or in the subject property’s legal phase (if the project is being developed in phases) must be “substantially complete” which means drywall and windows are installed, AND
    • 50% of the units in the project or subject legal phase must have been sold or under contract for sale to primary residence or second home purchasers

The full condo project review involves gathering more documents from the association. If I was a listing agent, I’d gather these documents in advance and perhaps review them to sniff out potential problems. The information could help a Seller decide if they should accept an offer with less than 10% down, which is one of the things that can trigger a full condo project review. (Keep in mind listing agents have to disclose adverse facts.)
Documents needed for a full condo review: 

  1. A longer condo questionnaire (provided by the lender to the association) that will determine if the condo project has features that make it ineligible for Fannie Mae financing.
  2. The current annual budget of the association – if the association is not setting aside at least 10% of its monthly income toward reserves, that’s a “fatal” problem. Reserves must be a line item in the budget. If a condo HOA has a current third-party reserve study that proves it already has adequate reserves, that can work in lieu of the “10% reserve rule” but I cannot ever recall this being the case.
  3. The bylaws of the association — Look for things like deed restrictions or right of first refusal.
  4. Articles of Organization (AKA the HOA’s Articles of Incorporation, which are legal identifying documents.

Contact Accunet for help preparing for a full condo review.

What makes a condo ineligible for Fannie Mae approval?

If the lender’s review of the condo project (either limited or full) reveals any of Fannie’s Mae’s “ineligible characteristics,” the unit is not eligible for Fannie Mae financing. View the full list of ineligible characteristics from Fannie Mae, and check out some of the most common finds:

  1. Inadequate master insurance coverage. This is the most common problem, even on projects that only require a limited review.
  2. There is any significant active or pending litigation involving the HOA, especially if the HOA is suing the developer.
  3. The HOA is not setting aside 10% of its monthly revenue toward a reserve fund.
  4. The project has any hotel/motel/resort features (like a rental / check-in desk)
  5. Deed or resale restrictions (e.g., the HOA has right of first refusal or imposes a fee upon the sale of a unit).

The big 5 Fannie condo insurance requirements

On top of everything else, Fannie Mae also has insurance requirements on condo projects, and it’s not rare for associations to have less coverage than is required. Here’s what you (or your Homeowner Association) need to get your project moving (for more granular information from Fannie Mae, click here):

  1. Replacement cost coverage. Every condo project must be insured to cover 100% of the cost to replace the project improvements, including the individual units should it be hit by a meteor (or other calamity) and destroyed or damaged.
  2. Building ordinance or law endorsement. This endorsement insures against the increased cost of repairs or improvements that could be enforced by new codes or land use laws after a covered loss event occurs.
  3. Boiler and machinery/equipment breakdown endorsement. This endorsement is required to protect against loss of a project’s central heating or cooling blowing up.  The coverage amount should be equal the lesser of $2 million or the insurable value of the buildings housing the boiler or machinery.
  4. Severability or interest/Separation of insureds. This is required to be a part of the liability policy. It essentially provides the condo unit owner the ability to sue or file a claim against the HOA, even though they are a member of the HOA.
  5. Fidelity bond (aka crime, or employee dishonesty). Oddly, lenders only have to verify this type of insurance coverage if a Full Condo Review is required, and the project has more than 20 units. Some Fannie Mae seller/servicers required proof of fidelity bond insurance even on limited reviews.

What if my condo project doesn’t meet Fannie Mae requirements?

Depending on the issue, Accunet Mortgage may have non-Fannie Mae money sources that can still fit your situation. For example, if a single entity owns more than 10%, but not more than 20%, of the units in a project, we have a money source.  Or if the building in which your condo unit is located is substantially complete, but there are other buildings in the project that are still under construction, we have a loan program for that, too: an adjustable rate mortgage where the initial rate is fixed for 5, 7 or 10 years.

If you made it the end of this weighty tome, congratulations, and thank you for learning more about the details of condo ownership and financing. There’s a lot more to it than meets the eye.

Learn more about the home buying process with Accunet Mortgage.