Selling Guide

Published April 25, 2017

B4-2.2-02: Full Review Process (10/24/2016)

This topic contains information on general eligibility requirements for the Full Review process, including:

Overview

The Full Review process is a method for the review of new and established condo projects. Lenders performing a Full Review must ensure that the project meets all applicable eligibility requirements.

Unit and Project Types Eligible for a Full Review

A Full Review may be performed when the unit securing the mortgage is an attached unit located in one of the following project types:

  • an established condo project, or

  • a new or newly converted condo project.

These projects may also be reviewed by Fannie Mae through the PERS process (see B4-2.2-07, Project Eligibility Review Service (PERS)). Detached condo units located in projects containing a mixture of attached and detached units are eligible for review using the Limited Review process (see B4-2.2-01, Limited Review Process).

Two- to four-unit condo projects reviewed using the Full Review process must comply with all requirements of the Full Review, unless specifically stated otherwise.

Full Review requirements for units in co-op projects are addressed in B4-2.3-02, Co-op Project Eligibility.

Note: Projects consisting of manufactured homes are not eligible for the Full Review process but must be submitted to Fannie Mae through the PERS process.

Condo Project Manager (CPM)

Lenders may use Condo Project Manager (CPM) to assist in their Full Review of a project. CPM is a web-based tool designed to help lenders determine if a project meets Fannie Mae’s eligibility requirements. When CPM is used as part of the project review, the lender must document the loan file with the CPM decision by including the unexpired CPM Certification in the file.

CPM Certifications are based solely on the data that the lender enters into CPM. The lender is responsible for reviewing the applicable project documentation to obtain the information needed to complete the project review and enter the data into CPM. The lender is also responsible for ensuring that all data entered into CPM is correct and that the project meets all applicable Fannie Mae eligibility requirements.

CPM is available on Fannie Mae's website.

Full Review Eligibility Requirements for Attached Units in Condo Projects

When determining the eligibility of a condo project on the basis of a Full Review, lenders must ensure the condo project meets the eligibility requirements described in the following table.

Full Review Eligibility Requirements –

For Attached Units in New, Established, or Two- to Four-Unit Condo Projects

The project must not be an ineligible project. (See B4-2.1-02, Ineligible Projects.)
The project must not be a manufactured housing project.

Note: Manufactured housing projects require a Fannie Mae PERS review.

The unit securing the mortgage satisfies all Fannie Mae's insurance requirements in Subpart B7, Insurance, including all provisions applicable to condo projects in Subpart B7-4, Additional Project Insurance.
When an appraisal is obtained, the appraisal of the subject unit must meet all applicable appraisal requirements, as stated in Subpart B4-1, Appraisal Requirements.
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.

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.

To determine whether the association has a minimum annual budgeted replacement reserve allocation of 10%, the lender must divide the annual budgeted replacement reserve allocation by the association’s annual budgeted assessment income (which includes regular common expense fees).

The following types of income may be excluded from the reserve calculation:

  • incidental income on which the project does not rely for ongoing operations, maintenance, or capital improvements;

  • income collected for utilities that would typically be paid by individual unit owners, such as cable TV or Internet access;

  • income allocated to reserve accounts; and

  • special assessment income.

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.

For projects in which the units are not separately metered for utilities, the lender must
  • determine that having multiple units on a single meter is common and customary in the local market where the project is located, and

  • confirm that the project budget includes adequate funding for utility payments.

Note: These requirements are not applicable to two- to four-unit projects.

The project must be located on contiguous parcels of land. It is acceptable for a project to be divided by public or private streets.
The structures within the project must be within a reasonable distance from each other.
Common elements and facilities, such as recreational facilities and parking, must be consistent with the nature of the project and competitive in the marketplace.
Unit owners in the project must have the sole ownership interest in, and rights to the use of the project’s facilities, common elements, and limited common elements, except as noted below.

Shared amenities are permitted only when two or more HOAs share amenities for the exclusive use of the unit owners. The associations must have an agreement in place governing the arrangement for shared amenities that includes the following:

  • a description of the shared amenities subject to the arrangement;

  • a description of the terms under which unit owners in the project may use the shared amenities;

  • provisions for the funding, management, and upkeep of the shared amenities; and

  • provisions to resolve conflicts between the associations over the amenities.

Examples of shared amenities include, but are not limited to, clubhouses, recreational or fitness facilities, and swimming pools.

The developer may not retain any ownership interest in any of the facilities related to the project. The amenities and facilities—including parking and recreational facilities—may not be subject to a lease between the unit owners or the HOA and another party. Parking amenities provided under commercial leases or parking permit arrangements with parties unrelated to the developer are acceptable.

Fannie Mae permits the financing of a single or multiple parking space(s) with the mortgage provided that the parking space(s) and residential unit are included on one deed as evidenced on the legal description in the mortgage. In such cases, the LTV, CLTV, and HCLTV ratios are based on the combined value of the residential unit and the parking space(s).
Phase I and II environmental hazard assessments are not required for condo projects unless the lender identifies an environmental problem through the performance of its project underwriting or due diligence.

In the event that environmental problems are identified, the problems must be acceptable, as described in E-2-02, Suggested Format for Phase I Environmental Hazard Assessments.

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.

Financial institution-owned REO units that are for sale (not rented) are considered owner-occupied when calculating the 50% owner-occupancy ratio requirement.

When the project does not meet the owner-occupied ratio of 50%, an investment property transaction will only be eligible if the lender submits the project to Fannie Mae

If the project was a gut rehabilitation project, all rehabilitation work involved in a condo conversion must have been completed in a professional manner.

“Gut rehabilitation” refers to the renovation of a property down to the shell of the structure, including the replacement of all HVAC and electrical components (unless the HVAC and electrical components are up to current code).

For a conversion that was legally created during the past three years, the architect’s or engineer’s report (or functional equivalent), that was originally obtained for the conversion must comment favorably on the structural integrity of the project and the condition and remaining useful life of the major project components, such as the heating and cooling systems, plumbing, electrical systems, elevators, boilers, roof, etc.

Note: If the project is a newly converted non-gut rehabilitation project with more than four residential units, lenders must submit the project to Fannie Mae for review and approval. See B4-2.2-07, Project Eligibility Review Service (PERS), for additional information.

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.

  • 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.

Replacement Reserve Studies

Reserve studies may be used to determine the appropriate level of reserves the HOA must maintain to ensure the project’s long-term success. Reserve studies will also provide useful information regarding the adequacy of the HOA’s current reserve funds and offer recommendations to meet funding goals in the event the HOA has under-reserved for its needs in the past. The lender may review the most current reserve study or a reserve study update provided it has been completed within three years of the date on which the lender approves the project.

Reserve studies must be prepared by an independent third party that has specific expertise in completing reserve studies. This expertise may include any of the following:

  • a reserve study professional with reserve study credentials,

  • a construction engineer,

  • a certified public accountant who specializes in reserve studies, or

  • any professional with demonstrated knowledge of and experience in completing reserve studies.

While Fannie Mae does not require that a standard format be used for the reserve study, the following items must be addressed:

  • all major components and elements of the project’s common areas for which repair, maintenance, or replacement is expected;

  • the condition and remaining useful life of each major component;

  • an estimate of the cost of repair, replacement, restoration, or maintenance of major components;

  • an estimate of the total annual contributions required to defray costs (minus the existing reserves funded for this purpose), including inflation;

  • an analysis of existing funded reserves; and

  • a suggested reserve funding plan.

Note: Individual states may have various statutes concerning the use and content of reserve studies. Fannie Mae requires that a reserve study used by the lender in its analysis meet or exceed requirements set forth in relevant state statutes.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2016–08 October 24, 2016
Announcement SEL-2015–12 November 3, 2015
Announcement SEL-2014–13 November 10, 2014
Announcement SEL-2013–04 May 28, 2013
Announcement SEL-2012–06 June 26, 2012
Announcement SEL-2010–16 December 1, 2010
Announcement 08–34 December 16, 2008