“Commonly Asked Condo Questions”

By: Stephanie Diana Wilson- Gast

So, in my position throughout my day I end up quoting the FNMA seller guide. Many others in the Condo Project Review field have also noted that they repeat the same guidelines as they are commonly asked questions. This gave me the bright idea to make a list of commonly asked questions and the quotes from the FNMA seller guide as a method of helping underwriters, and investors navigate the condo mortgage world.

Now for the CYOB (Cover Your Own Bottom) portion of this post. These quotes are from the FNMA seller guide updated 11/03/15 found on FNMA’s underwriting website at https://www.fanniemae.com/content/guide/selling/index.html. These are not my expressed opinions and for further information on these topics please consult your underwriter or mortgage professional. The pages are referenced at the bottom of each quote to assist in locating the direct quote. Also please note that FNMA updates their guidelines monthly and these quotes are subject to change based on FNMA’s updates. These quotes only reflect quotes from the guideline that was current at time of this post which was dated 11/03/15.

wpid-1.-skyscraper.jpg.jpg

Commonly Asked Topics and FNMA Quotes

FNMA Seller Guide Updated 11/3/15

Quote

Topic

Lenders must review the HOA projected budget to determine that it is adequate (i.e., it includes allocations for line items pertinent to the type of condo project), and provides for the funding of replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the budget….The lender may use a reserve study in lieu of calculating the replacement reserve of 10% provided the following conditions are met: the lender obtains a copy of an acceptable reserve study and retains the study and the lender’s analysis of the study in the project approval file, the study demonstrates that the project has adequate funded reserves that provide

financial protection for the project equivalent to Fannie Mae’s standard reserve

requirements,

• the study demonstrates that the project’s funded reserves meet or exceed the

recommendations included in the reserve study, and

Budget

• the study meets Fannie Mae’s requirements for replacement reserve studies listed

at the end of this section.

Note: These requirements for a budget review, replacement reserves, and

reserve study are not applicable to two- to four-unit projects. (Page 688 FNMA seller guide updated 11/3/15)”.

The lender may use a reserve study in lieu of calculating the replacement reserve of

10% provided the following conditions are met:

• the lender obtains a copy of an acceptable reserve study and retains the study and

the lender’s analysis of the study in the project approval file,

• the study demonstrates that the project has adequate funded reserves that provide

financial protection for the project equivalent to Fannie Mae’s standard reserve

requirements,

• the study demonstrates that the project’s funded reserves meet or exceed the

recommendations included in the reserve study, and

• the study meets Fannie Mae’s requirements for replacement reserve studies listed

at the end of this section.

Note: These requirements for a budget review, replacement reserves, and

Reserve study are not applicable to two- to four-unit projects. (Page 689 FNMA seller guide updated 11/3/15)

Reserve Study

Individual condo units:

Stand-alone flood insurance dwelling policies for an attached individual condo unit are not acceptable. A master condo flood insurance policy must be maintained by the HOA, subject to the coverage requirements below. (For detached units, refer to the requirements described in Coverage for First Mortgages above.)

Condo projects:

Flood Insurance

The HOA must obtain a Residential Condominium Building Association Policy or equivalent private flood insurance coverage for each building that is located in an SFHA. The policy must cover all of the common elements and property (including machinery and equipment that are part of the building), as well as each of the individual units in the building.

The master flood insurance policy must be at least equal to the lower of

80% of the replacement cost, or

the maximum insurance available from NFIP per unit (which is currently $250,000).

If the condo project master policy meets the minimum coverage requirements above but does not meet the one- to four-unit coverage requirements (described in Coverage for First Mortgages), a supplemental policy may be maintained by the unit owner for the difference.

The contents coverage should equal 100% of the insurable value of all contents (including machinery and equipment that are not part of the building), owned in common by association members.

If the condo project has no master flood insurance policy or if the master flood insurance policy does not meet the requirements above, mortgages securing units in that project are not eligible for delivery to Fannie Mae.

Note: DU Refi Plus and Refi Plus loans secured by units in a condo project are not required to meet the flood insurance requirements for master flood insurance policies stated in this section. Rather, if no master policy is in place, a stand-alone dwelling policy may be maintained by the unit owner to meet the full one- to four-unit requirements. If the master policy is deficient

(by any amount), a supplemental policy may be maintained by the unit owner for the difference between the master policy and the one- to four-unit requirements. (FNMA seller guide 11/03/15 Page 963)

Boiler and Machinery/Equipment Breakdown Endorsement, if the project has central heating or cooling. This endorsement should provide for the insurer’s minimum liability per accidentto at least equal the lesser of $2 million or the insurable value of the building(s) housing the

boiler or machinery. In lieu of obtaining this as an endorsement to the commercial package

policy, the project may purchase separate standalone boiler and machinery coverage. (FNMA seller guide updated 11/03/15 page 952).

Boiler

Policies with Coinsurance

Policies with coinsurance provisions can create additional risk for an HOA in the event of a loss

if the amount of insurance coverage is less than the full insurable value. Master property policies

that provide coverage at 100% of the insurable replacement cost of the project improvements,

including the individual units, alleviate the risk of a coinsurance penalty being applied in the

event of a loss.

If the policy has a coinsurance clause, inclusion of an Agreed Amount Endorsement or selection

of the Agreed Value Option (which waives the requirement for coinsurance) is considered

acceptable evidence that the 100% insurable replacement cost requirement has been met. If an

Agreed Amount/Agreed Value provision is used, the Agreed Amount must be no less than the

estimated replacement cost.

If the policy includes a coinsurance clause, but the coinsurance provision is not waived, the

Coinsurance

policy is still eligible if evidence acceptable to the lender confirms that the amount of coverage

is at least equal to 100% of the insurable replacement cost of the project improvements. This

evidence (documentation) must be maintained by the lender. (FNMA Seller Guide updated 11/03/15 page 951).

“Bare Walls” policy: This policy typically provides no coverage for the unit interior, which

includes fixtures, equipment, and replacement of interior improvements and betterments.

As a result, the borrower must obtain an individual HO-6 policy that provides coverage

sufficient to repair the condo unit to its condition prior to a loss claim event, as determined

by the insurer. (FNMA Seller Guide updated 11/03/15 page 950)

HO-6/ Walls in

As seen in the Ineligible Project Characteristics: Projects in which a single entity (the same individual,

investor group, partnership, or corporation) owns

more than the following total number of units in the

project:

• projects with 2 to 4 units – 1 unit

• projects with 5 to 20 units – 2 units

• projects with 21 or more units – 10%

Units currently subject to any lease arrangement must

be included in the calculation. This includes lease

arrangements containing provisions for the future

purchase of the units such as lease-purchase and

lease-to-own arrangements.

Units are not included in the calculation if they are

owned by the project sponsor or developer and are

Single Entity Ownership

vacant and being actively marketed for sale. (FNMA seller guide updated 11/03/15 page 666).

Fannie Mae requires that no more than 25% of a condo or co-op project or 25% of the building

in which the project is located be commercial space or allocated to mixed-use. This includes

commercial space that is above and below grade.

Any commercial space in the project or in the building in which the residential project is located

must be compatible with the overall residential nature of the project.

Note: Rental apartments and hotels located within the project must be classified as

commercial space even though these may be considered “residential” in nature.

Calculation of Commercial Space. Commercial space allocation is calculated by dividing the

total non-residential square footage by the total square footage of the project or building. Lenders

are responsible for determining the total square footage of the project, the square footage of

the non-residential space, and the residential space square footage. This calculation includes

the total square footage of commercial space even if the residential and commercial owners are

represented by separate associations. (FNMA seller guide updated 11/03/15 page 672)

Commercial Space

As seen in the Ineligible Project Characteristics: Projects with mandatory upfront or periodic

membership fees for the use of recreational amenities,

such as country club facilities and golf courses,

owned by an outside party (including the developer

Country Clubs with mandatory fees

or builder). Membership fees paid for the use of

recreational amenities owned exclusively by the HOA

or master association are acceptable. (FNMA seller guide updated 11/03/15 Page 665).

Projects that Operate as Hotels or Motels

Projects with one or more of the following characteristics may be operating as a hotel or motel

and are therefore ineligible:

• hotel or motel conversions (or conversions of other similar transient properties), unless the

project is an established project, meets all requirements for gut rehabilitation projects, and all

units are residential dwelling units;

• projects that include registration services and offer rentals of units on a daily basis;

• projects that restrict the owner’s ability to occupy the unit; and

• projects with mandatory rental pooling agreements that require unit owners to either rent their

units or give a management firm control over the occupancy of the units.

– 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 use restrictions. In return, the unit owner receives a

share of the revenue generated from the rental of the unit. (FNMA seller guide updated 11/03/15 page 668).

Condo Hotel

Projects that Operate as a Continuing Care Community or Facility

Mortgages secured by units in a project that operates, either wholly or partially, as a continuing

Continuing Care

care community are ineligible for delivery to Fannie Mae. These communities or facilities are

residential projects designed to meet specialized health and housing needs and typically require

residents to enter into a lifetime contract with the facility to meet all future health, housing, or

care needs. These communities may also be known by other names such as life-care facilities.

Projects that make continuing care services available to residents are eligible only if the

continuing care facilities or services are not owned or operated by the HOA and residential unit

owners are not obligated to purchase or utilize the services through a mandatory membership,

contract, or other arrangement. (FNMA seller guide updated 11/03/15 page 671)

Live-Work Projects

Live-work projects are projects that permit individual residential unit owners to operate and run

a small business from their residential unit. Units in projects that permit live-work arrangements

are eligible for sale to Fannie Mae provided the following additional requirements are met:

• The overall character of the project is residential.

• Live-work units must be limited to residential units that are occupied as primary residences in

which the unit owner is the owner and operator of the small business. The live-work unit must be primarily residential in character with minimal space designated to

or modifications made to accommodate the unit owner’s commercial activity.

• The commercial use must be consistent with the residential nature of the project.

• The project documents must permit

Live Work

commercial use and state what types of commercial use

are acceptable.

• The project must conform to any applicable local ordinances governing the structure and

operation of live-work projects including limitations on the number of live-work units or the

percentage of live-work unit space permitted.

The lender must confirm that the live-work component of the project is considered and

adequately addressed in the appraiser’s assessment of the property. All of the following

requirements must be met:

• The appraisal must include an adequate description of the live-work characteristics of the

project and the unit.

• The market value of the unit is primarily a function of its residential characteristics, rather than

of the business use or any special business-use modifications that were made.

• The future marketability of the unit will not be negatively impacted by the business use or any

special business-use modifications that have been made. (FNMA seller guide updated 11/03/15 Page 674)

which the project 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 are ineligible for sale to

Fannie Mae.

If the lender determines that pending litigation involves minor matters with no impact on the

safety, structural soundness, habitability, or functional use of the project, the project is eligible

provided the litigation is limited to one of the following categories:

• non-monetary litigation involving neighbor

Litigation

disputes or rights of quiet enjoyment;

• litigation for which the claimed amount is known, the insurance carrier has agreed to provide

the defense, and the amount is covered by the HOA’s or co-op corporation’s insurance; or

• the HOA or co-op is named as the plaintiff in a foreclosure action, or as a plaintiff in an action

for past due HOA assessments. (FNMA seller guide updated 11/03/15 page 676)

No more than 15% of the total units in a project may be 60 days or more past due

on their common expense assessments (also known as HOA dues). For example,

a 100–unit project may not have more than 15 units that are 60 days or more past

due.

Note: In a two- to four-unit project, no unit owners may be 60 or more days

past due on their HOA common expense assessments.

This ratio is calculated by dividing the number of units with common expense

assessments that are past due by 60 or more days by the total number of units in the

project. (FNMA seller guide updated 11/03/15 page 688)

Delinquency

For investment property transactions on attached units in established projects

(including two- to four-unit projects), at least 50% of the total units in the project

must be conveyed to principal residence or second home purchasers. This

requirement does not apply if the subject mortgage is for a principal residence or

second home. (FNMA seller guide updated 11/03/15 page 691)

Investment

For newly converted two- to four-unit non-gut rehabilitation projects, the following

requirements apply:

• All rehabilitation work involved in a condo conversion must have been

completed in a professional manner.

2-4 unit new conversion / non gut 2-4

• A current reserve study prepared by a qualified, independent professional

company, accompanied by an engineer’s report, or functional equivalent, must

comment favorably on the structural integrity of the project and the remaining

useful life of the major project components.

• The project budget must contain line items for the following:

– reserves that adequately support the costs identified in the reserve study, even

if the study recommends budgeting reserves greater than 10% of the project’s

income;

– funds to cover the total cost of any items identified in the reserve study or

engineer’s report that need to be replaced within 5 years from the date of

the study must be deposited in the HOA’s reserve account, in addition to the

amount stated immediately above; and

– a utility contingency of at least 10% of the previous year’s utility costs if the

utilities are not separately metered.

Note: Newly converted gut rehabilitation projects must follow the standard

gut rehabilitation requirements listed under the eligibility requirements

above. (FNMA seller guide updated 11/03/15 page 692).

The project, or the subject legal phase, must be “substantially complete” unless

other completion arrangements have been approved by Fannie Mae through the

PERS review process.

There may not be more than one legal phase per building.

“Substantially complete” means that

• a certificate of occupancy or other substantially similar document has been

issued by the applicable governmental agency for the project or subject phase;

and

• all the units and buildings in the legal phase in which the unit securing the

New Construction/ Occupancy cert

mortgage is located are complete, subject to the installation of buyer selection

items, such as appliances.

Note: Fannie Mae does not require the installation of typical buyer selection

items such as appliances, floor coverings, counter tops, or light fixtures that

are common and customary for the market, although buyer selections that

involve the modification of a unit floor plan must be complete. Lenders

are expected to obtain appropriate documentation to verify that all buyer

selection items for the unit being financed are properly installed prior to

closing.

Two- to four-unit projects: All units, common elements, and facilities within the

project must be 100% complete and not subject to additional phasing even when the

project is a new or newly converted project. (FNMA seller guide updated 11/03/15 page 695)

At least 50% of the total units in the project or subject legal phase must have been

conveyed or be under contract for sale to principal residence or second home

purchasers. (FNMA seller guide updated 11/03/15 page 695)

New construction pre-sale

Two- to four-unit projects: All but one unit in the project must have been

conveyed or be under contract for sale to a principal residence or second home

purchaser. Individual units in new condo projects must be available for immediate occupancy

at the time of loan closing. (FNMA seller guidelines updated 11/03/15 page 696)

2-4 new construction

• Limited Review, or

• Fannie Mae Review through the streamlined

PERS process (for established condo projects)

Note: There are no LTV ratio or

occupancy restrictions for Limited Review

Detached condo unit in a new or established

project,

including a detached unit in a condo project

that includes a mixture of attached and

detached units

eligibility for detached condo units. (FNMA seller guideline updated 11/03/15 page 658)

A project for which all of the following are true:

• at least 90% of the total units in the project have been conveyed

to the unit purchasers;

• the project is 100% complete, including all units and common

elements;

• the project is not subject to additional phasing or annexation; and

• control of the HOA has been turned over to the unit owners. (FNMA seller guide updated 11/03/15 page 656)

Established Condo Project defined

A project for which one or more of the following is true: fewer than 90% of the total units in the project have been

conveyed to the unit purchasers;

• 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;

• the project is newly converted; or

• the project is subject to additional phasing or annexation. (FNMA seller guide updated 11/03/15 page 657)

New Construction Project defined

The project is not an ineligible project.

The project does not consist of manufactured homes.

If the subject unit is a detached unit, the unit securing the mortgage must be 100%

complete.

The appraisal of the subject unit meets all applicable appraisal requirements, as

stated in Chapter B4-1, Appraisal Requirements.

The appraisal of the subject unit meets all applicable appraisal requirements, as

stated in Chapter B4-1, Appraisal Requirements.

The unit securing the mortgage satisfies all

Limited Review Eligibility Requirements

insurance requirements as stated in

Subpart B7, Insurance, including all provision applicable to condo projects in

Chapter B7–4, Additional Project Insurance. (FNMA seller guide updated 11/03/15 page 685)

Advertisements

One thought on ““Commonly Asked Condo Questions”

  1. I was glad to read this post as it contains some great knowledge. Sharing this great article help me a lot!I love reading and I am always searching for information like this. Keep on sharing more articles author. Thanks!!!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s