Fannie Mae will not purchase or securitize mortgage loans that are secured by units in certain condo or co-op projects if those projects have characteristics that make the project ineligible. Such characteristics are described in the table below, with additional details provided in the sections that follow. All eligible projects must be created and remain in full compliance with state law and all other applicable laws and regulations of the jurisdiction in which the project is located.
Note: If a lender determines that a project does not meet all of Fannie Mae’s project eligibility requirements but believes that the project has merit and warrants additional consideration, the lender may request an exception (see B4-2.2-09, Projects with Special Considerations and Project Eligibility Waivers, for additional information).
|Ineligible Project Characteristics||Condo
|Investment securities (i.e., projects that have documents on file with the Securities and Exchange Commission (SEC) or projects where unit ownership is characterized or promoted as an investment opportunity).||√||√|
|Timeshare, fractional, or segmented ownership projects.||√||√|
|New projects where the seller is offering sale or 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 assessments, or principal and interest payment abatements, and/or contributions not disclosed on the settlement statement.||√||√|
|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 or builder). Membership fees paid for the use of recreational amenities owned exclusively by the HOA or master association are acceptable.||√||√|
|Projects that are managed and operated as a hotel or motel, even though the units are individually owned. (See section below for additional detail.)||√||√|
|Projects with covenants, conditions, and restrictions that split ownership of the property or curtail an individual borrower’s ability to utilize the property. (See section below for additional detail.)||√||√|
|Projects with property that is not real estate, such as houseboat projects. (See section below for additional detail.)||√||√|
|Any project that is owned or operated as a continuing care facility. (See section below for additional detail.)||√||√|
|Projects with non-incidental business operations owned or operated by the HOA including, but not limited to, a restaurant, spa, or health club. (See section below for additional detail and exceptions to this policy.)||√|
|Projects that do not meet the requirements for live-work projects. (See section below for additional detail.)||√||√|
|Projects in which the HOA or co-op corporation is named as a party to pending litigation, or for 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. (See section below for additional detail.)||√||√|
|Any project that permits a priority lien for unpaid common expenses in excess of Fannie Mae’s priority lien limitations. (See section below for additional detail.)||√|
|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:
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 vacant and being actively marketed for sale.
|Multi-dwelling unit projects that permit an owner to hold title (or stock ownership and the accompanying occupancy rights) to more than one dwelling unit, with ownership of all of his or her owned units (or shares) evidenced by a single deed and financed by a single mortgage (or share loan). (See section below for additional detail.)||√||√|
|The total space that is used for nonresidential
or commercial purposes may not exceed 25%.
(See section below for additional detail.)
|Projects containing manufactured housing that have not been approved by Fannie Mae through the PERS process, as required.||√||√|
|Newly converted non-gut rehabilitation projects with more than four attached units that have not been approved by Fannie Mae through the PERS process, as required.||√||√|
|New or newly converted projects in Florida with attached units that have not been approved by Fannie Mae through the PERS process, as required.||√||√|
|Projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction. (See B4-1.3-04, Site Section of the Appraisal Report.)||√||√|
|Co-op projects that are subject to leasehold estates.||√|
|Limited equity co-ops – projects in which the co-op corporation places a limit on the amount of return that can be received when stock or shares are sold.||√|
|A tax-sheltered syndicate’s leasing to a co-op or “leasing” co-ops – projects that involve the leasing of the land and the improvements to the co-op corporation, even if the co-op corporation owns part of the building.||√|
|Co-op projects in which the developer or sponsor has an ownership interest or other rights in the project real estate or facilities other than the interest or rights it has in relation to unsold units.||√|
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.
The lender must perform an analysis of the project to determine whether it is operating as a hotel or motel. There are several sources of information on which to rely, including but not limited to:
project legal and recorded documents and exhibits,
the contract for sale, and
Project characteristics that may indicate the project is operating as a hotel or motel include, but are not limited to:
central telephone system,
units that do not contain full-sized kitchen appliances,
daily cleaning service,
advertising of rental rates,
restrictions on interior decorating,
central key systems,
location of the project in a resort area,
owner-occupancy density — the project may have few or even no owner-occupants,
projects converted from a hotel or motel,
units that are less than 400 square feet,
projects with a name that includes the word “hotel” or “motel,” or
interior doors that adjoin other units.
Lenders must thoroughly examine the appraisal, contract for sale, and other documents to determine if there are guaranteed rent-backs, references to mandatory rental pooling or management agreements, and SEC filing references and prospectus documents.
The Internet has become a useful tool for obtaining project and unit-specific information. The project’s website may contain information on the project type, amenities, and the availability of units for rent. Internet searches may identify unit owners offering their unit for short term rentals within the subject property’s project. As long as the project is not being operated as a hotel or motel and the units are not subject to mandatory rentals or to optional leasing programs to a hotel or motel, then the advertising of a unit for short term rental by the unit owner does not, alone, constitute the project as a hotel or motel. The lender is responsible for fully evaluating the project to understand if the practice of offering short-term rentals by unit owners is organized in such a way that the project’s predominant use is to operate as a hotel or motel.
Projects with covenants, conditions, and restrictions that split ownership of the property or curtail an individual borrower’s ability to utilize the property are not eligible for delivery to Fannie Mae. These types of properties include, but are not limited to, the following:
“common interest” apartments or community apartment projects that are projects or buildings owned by several owners as tenants-in-common or by an 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;
projects that restrict the owner’s ability to occupy the unit, even if the project is not being operated as a motel or hotel; 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 are formal agreements between the developer, association, and/or the individual unit owners that 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.
Projects that contain multi-dwelling units are not permitted. These projects allow an owner to hold title (or share ownership and the accompanying occupancy rights) to a single legal unit that is sub-divided into multiple residential dwellings within the single legal unit, with ownership of the unit (or shares) evidenced by a single deed and financed by a single mortgage (or share loan). The sub-divided units are not separate legal units. This restriction applies regardless if the unit owner maintains one or more of the sub-divided units as rental units or uses one or more of the sub-divided units as accessory or lock-out units.
This provision does not apply to condo or co-op projects that allow an individual to buy two or more individual legal units with the intent of structurally and legally combining the units for occupancy as a single-unit dwelling. Mortgages secured by units in these types of projects are eligible for purchase and securitization by Fannie Mae provided all of the following requirements are met:
The unit securing the mortgage represents a single legal unit under a single deed.
Any construction or renovation to structurally combine units has no material impact on the structural or mechanical integrity of the project’s buildings or the subject property unit.
The individual units must be fully described in the legal description in the mortgage and under a single deed.
The project’s legal documents must have been amended to reclassify the combined units as a single unit in the project.
All structural renovation to physically combine the units must be completed.
A condo or co-op unit with an accessory unit may be eligible on a case-by-case basis with a Fannie Mae PERS Project Approval or a loan-level Project Eligibility Waiver. See B4-2.2-09, Projects with Special Considerations and Project Eligibility Waivers, for additional information on submitting an exception request.
Fannie Mae acquires mortgage loans secured by real estate. Houseboats, boat slips, cabanas, timeshares, and other forms of property that are not real estate are not eligible for delivery to Fannie Mae. The marketability and value of individual units in a project may be adversely impacted by the inclusion of non-real estate property such as houseboats, timeshares, and other forms and structures that are not real estate. As such, projects containing these other non-real estate forms of property are not eligible.
Boat slips, cabanas, and other amenities are permitted when owned in common by the unit owners as part of the HOA.
Mortgages secured by units in a project that operates, either wholly or partially, as a continuing 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.
Continuing care communities are not the same as age-restricted projects. Age-restricted projects that restrict the age of residents but do not require residents to enter into a long-term or lifetime contract for healthcare and housing as the residents age are eligible.
A condo project is ineligible if the HOA is receiving more than 10% of its budgeted income from non-incidental business arrangements related to the active ownership and/or operation of amenities or services available to unit owners and the general public. This includes, but is not limited to, businesses such as a restaurant or other food- and beverage-related services, health clubs, and spa services.
Non-incidental income from the following sources is permitted provided the income does not exceed 15% of the project’s budgeted income:
income from the use of recreational amenities or services owned by the HOA for the exclusive use by unit owners in the project or leased to another project according to a shared amenities agreement (as noted below), or
income from the leasing of units in the project acquired by the HOA through foreclosure.
The single-entity ownership limits (described in the Ineligible Project Characteristics table above) will apply to the number of units owned and rented by the HOA.
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.
Non-residential square footage includes:
retail and commercial space,
parking space that is separate from parking allocated to residential unit owners, and
space that is non-residential in nature and owned by a private individual or entity outside of the HOA structure.
Examples include, but are not limited to:
public parking facilities (fee-based or free),
private membership-based fitness facilities.
Non-residential square footage excludes amenities that are:
residential in nature;
designated for the exclusive use of the residential unit owners (such as, but not limited to, a fitness facility, pool, community room, and laundry facility); and
owned by the unit owners or the HOA.
The following table shows which commercial or mixed-use space must be included in the calculation of the percentage of commercial space.
|If the commercial or mixed-use space is…||Then its square footage is included in the calculation of commercial space percentage|
|owned, controlled, or operated by the subject property’s HOA that is unrelated to the project-specific amenities offered for the exclusive use and enjoyment by the HOA members||Yes|
|owned by the subject property’s HOA
but controlled or operated by a separate private entity
Example: Office space owned by the HOA but leased to a private business.
|owned and controlled by a project HOA other than the subject property’s HOA that shares the same master HOA with the subject property’s HOA AND the commercial space is co-located in the project’s building(s) that contain(s) the residential units||Yes|
|owned, controlled, or operated by a private
entity that is co-located in the building(s) that contain(s) the
project’s residential units
|owned, controlled, or operated by a private entity that is NOT co-located in the building(s) or common elements as declared in the project legal documents that contain(s) the project’s residential units||No|
|owned and controlled by a project HOA other than the subject property’s HOA that shares the same master HOA with the subject property’s HOA BUT the commercial space is located in a building that is separate from the building(s) containing the project’s residential units||No|
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 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.
Projects in which the HOA or co-op corporation is named as a party to pending litigation, or for 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 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.
The lender must obtain documentation to support its analysis that the litigation meets Fannie Mae’s criteria for minor litigation as described above.
If the lender is aware of pending litigation and is unable to determine whether the litigation may be deemed a minor matter, the lender may contact Fannie Mae's Project Standards team (see E-1-03, List of Contacts) to determine whether Fannie Mae will accept delivery of mortgages secured by units in the project.
Fannie Mae allows a limited amount of regular common expense assessments (typically known as HOA fees) to have priority over Fannie Mae's mortgage lien for mortgage loans secured by units in a condo or PUD project. This applies if the condo or PUD project is located in a jurisdiction that has enacted
the Uniform Condominium Act,
the Uniform Common Interest Ownership Act, or
a similar statute that provides for unpaid assessments to have priority over first mortgage liens.
The table below describes the permitted priority of common expense assessments for purposes of determining the eligibility of a mortgage loan secured by a unit in a condo or PUD project for purchase by Fannie Mae.
|If the condo or PUD project ...||Then...|
|is located in a jurisdiction that enacted a law on or before January 14, 2014, that provides that regular common expense assessments will have priority over Fannie Mae's mortgage lien for a maximum amount greater than six months,||the maximum number of months of regular common expense assessments permitted under the applicable jurisdiction’s law as of January 14, 2014, may have priority over Fannie Mae’s mortgage lien, provided that if the applicable jurisdiction’s law as of that date referenced an exception for Fannie Mae’s requirements, then no more than six months of regular common expense assessments may have priority over Fannie Mae’s mortgage lien.|
|is located in any other jurisdiction,||no more than six months of regular common expense assessments may have priority over Fannie Mae’s mortgage lien, even if applicable law provides for a longer priority period.|
Notwithstanding any provisions to the contrary in the Guide, which do not require the lender to represent or warrant compliance with Fannie Mae project legal document requirements, the condo or PUD project legal documents must evidence compliance with the above priority of common expense assessment requirements.
The table below provides references to the Announcements that have been issued that are related to this topic.