May 1, 2009

Compliance with Fannie Mae and FHA Condominium Lending Standards

Mortgage giant Fannie Mae and the Federal Housing Administration (FHA) are major sources of money for individuals seeking to purchase or refinance condominium units. If a condominium association does not meet their lending standards, owners will find it more difficult to sell and refinance their units, which may have an adverse impact on the value of all units. Condominium boards should therefore take several key lending standards into account as they manage their associations' affairs.

The number of condominium units that are occupied by their owners is one important standard. The FHA requires that at least 51% of the units be owner-occupied before it will approve a loan. Some mortgage insurers will reject applications if less than 70% of the units are owner-occupied. Boards should take these restrictions into account when evaluating the number of rentals in their associations and whether to amend their declarations to restrict the number of units that may be rented.

The number of condominium units that are delinquent in the payment of monthly assessments is a second important standard. Fannie Mae requires that no more than 15% of the units may be 30 days or more past due. Fannie Mae has recently clarified that it will work with lenders who request waivers when a particular project exceeds this 15% threshold, and that exceptions are typically granted if the project can sustain itself with 15% or more of the units delinquent. However, there is no guarantee that lenders will request such exceptions or that they will be granted, and high delinquency rates will at a minimum make obtaining a loan more complex. Boards should take this restriction into account when evaluating their collection policies and how to deal with delinquent owners.

The amount of funds set aside for maintenance of the condominium is a third important standard. Fannie Mae requires that at least 10% of the association's operating budget be reserved for "capital expenditures and deferred maintenance". Boards should take this restriction into account when evaluating their associations' budgets.

Bringing a condominium association into compliance with these lending standards will promote both the short-term financial health of the association and the long-term financial health of all unit owners. It may not be an easy goal to accomplish, but the potential benefits make it worth the effort.