Buying a single-family home is straightforward: the lender looks at the borrower and the house. But when it comes to condominiums, there is a third, silent partner in the transaction—the Condo Association (HOA). For a loan to close, it’s not enough for the buyer to be creditworthy; the building itself must pass a rigorous physical and financial exam known as the Conventional Condo Project Review.
For real estate agents, lenders, and HOA boards, understanding this review is the difference between a smooth closing and a deal that falls apart days before settlement. This guide breaks down exactly what the review entails, why Fannie Mae and Freddie Mac hold the keys to the kingdom, and how you can navigate the process with confidence.
What Exactly Is a Conventional Condo Project Review?
At its core, a Conventional Condo Project Review is a risk assessment tool. When a lender provides a mortgage for a condo unit, they aren’t just securing the loan against the interior of that specific apartment; they are securing it against the future viability of the entire project.
If the roof collapses or the HOA goes bankrupt, the value of that individual unit plummets. Therefore, before a lender approves a “Conventional” loan (one that isn’t backed by the FHA or VA), they must verify that the condominium project is healthy. This process reviews several critical health markers:
- Financial Stability: Does the HOA have enough money to operate?
- Physical Integrity: Are there deferred maintenance issues or structural defects?
- Legal Compliance: Is the project involved in dangerous litigation?
- Insurance Coverage: Is the building adequately insured against disasters?
If the project passes this review, it is deemed “Warrantable.” If it fails, it is “Non-Warrantable,” making financing significantly more difficult and expensive.
Why Do Fannie Mae and Freddie Mac Guidelines Matter?
You might wonder, “Why does my local bank care what Fannie Mae thinks?” The answer lies in the secondary mortgage market.
Most lenders in the United States do not keep the loans they originate. Instead, they bundle these mortgages and sell them to Government-Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac. This clears the lender’s books, giving them the cash to go out and make more loans.
However, Fannie and Freddie will only buy loans that meet their strict safety standards. If a condo project doesn’t meet their guidelines, the lender cannot sell that loan. The lender would be stuck holding the “bag” (the risk). Because most lenders don’t want to hold that risk, they adopt Fannie and Freddie’s guidelines as their own.
In short: Fannie Mae and Freddie Mac set the rules. If a condo project doesn’t play by them, conventional financing generally disappears.
What Is the Difference Between a Limited Review and a Full Review?
Not all condo loans require the same level of scrutiny. Depending on the borrower’s financial strength and the type of property, the lender may opt for a “Limited Review” or a “Full Review.” Understanding the difference is crucial for structuring a deal.
The Limited Review
Think of this as “Condo Lite.” It is a streamlined process with less paperwork and faster turnaround times.
- Who qualifies? Typically, borrowers who are putting down a large down payment (often 10% to 25% depending on occupancy status) and buying in an established project.
- What is checked? The lender verifies basic info: the project isn’t a “condotel,” it’s not involved in litigation, and insurance is adequate.
- What is SKIPPED? Crucially, a Limited Review often skips the deep dive into the HOA’s budget and reserve study. This is a massive advantage for older associations that might struggle with the strict “10% reserve” rule.
The Full Review
This is the deep dive. It is required for new construction, investment properties, and borrowers with lower down payments.
- Who qualifies? Almost any borrower, but the project must meet every single guideline.
- What is checked? Everything. The budget, the reserve study, delinquency rates, commercial space percentage, and by-laws.
- The Hurdle: If the project fails a Full Review, the loan is denied.
What Are the “Deal Killers” in a Project Review?
When a Condo Approval Professional looks at a project, they are hunting for “Red Flags”—specific issues that automatically trigger a rejection from Fannie Mae or Freddie Mac. Being aware of these can save you weeks of wasted time.
Here are the most common deal killers:
- Inadequate Reserves: The HOA fails to allocate 10% of its annual operating budget to a reserve fund for capital repairs.
- High Delinquency: More than 15% of unit owners are over 60 days behind on their HOA dues. This signals cash flow problems.
- Litigation: The HOA is being sued (or is suing someone) regarding safety, structural soundness, or habitability.
- Commercial Space: The building is used more for business than living. Generally, commercial space cannot exceed 35% of the total square footage.
- Single Entity Ownership: One person or entity owns too many units (usually capped at 10-20% depending on project size).
- “Condotel” Features: The project operates like a hotel, with a front desk, daily cleaning services, or mandatory rental pooling. Conventional loans are strictly for residential properties, not businesses.
Why Is the 10% Reserve Requirement So Critical?
Of all the guidelines, the “10% Reserve Rule” causes the most friction. Fannie Mae requires that 10% of the HOA’s income be set aside specifically for reserves every year.
Why does this matter?
Condos are expensive to maintain. Roofs leak, elevators break, and parking lots crumble. If an HOA doesn’t have a savings account (reserves) to pay for these big-ticket items, they have to hit the homeowners with a Special Assessment—a sudden, mandatory bill that can range from $5,000 to $50,000 per unit.
Lenders hate special assessments because they shock the borrower’s finances and increase the risk of foreclosure. The 10% rule is a buffer. It ensures the HOA is saving for a rainy day, protecting both the building’s value and the borrower’s wallet.
How Does the “Deferred Maintenance” Rule Affect Reviews?
Following the tragic collapse of the Champlain Towers South in Surfside, Florida, Fannie Mae and Freddie Mac introduced strict new rules regarding safety and deferred maintenance.
Today, a review must confirm that the building is safe.
- Inspections: If the building has had a structural inspection in the last 3 years, the lender needs to see it.
- Critical Repairs: If the inspection found “critical repairs” (issues affecting safety or structural integrity), the project is ineligible until those repairs are completed and paid for.
- Special Assessments: Lenders will scrutinize any special assessment to see if it is for critical safety repairs. If it is, the loan might be paused until the work is done.
This has made the review process much more rigorous for older buildings. It is no longer just about the numbers; it is about the concrete and steel.
Who Actually Performs the Condo Project Review?
This is a common point of confusion. The “Review” isn’t usually done by a government official at Fannie Mae. It is done by the Lender or a designated third-party vendor like Condo Approval Professionals.
- The Lender’s Underwriter: Many banks have internal teams that review the documents.
- Project Review Vendors: Specialized companies (like us!) that lenders hire to gather the documents, analyze the budget, and issue a certification that the project meets the guidelines.
Using a specialized professional is often faster and more accurate because condo guidelines change frequently. A specialist stays up-to-date on the latest “FAQs” and “Seller Guide Updates” from the agencies, ensuring a valid approval that won’t get kicked back later.
How Can Real Estate Agents and HOAs Prepare?
The best offense is a good defense. You don’t want to find out a project is non-warrantable three days before closing.
For Listing Agents:
- Ask the HOA Board: “Are we currently FHA or VA approved?” (While different from Conventional, it’s a good sign).
- Check the Budget: Look at the line item for “Reserves.” Is it 10% of the total income?
- Ask about Litigation: Is the association involved in any lawsuits?
For HOAs:
- Keep your books in order. Ensure your budget clearly separates “Operating” funds from “Reserve” funds.
- Track delinquencies aggressively. Do not let unpaid dues pile up beyond that 15% threshold.
- Work with a Condo Approval Professional to get a “Pre-Approval” or “Certification” so you can market your units as “Financing Available.”
Conclusion
The Conventional Condo Project Review is the gatekeeper of modern condo financing. While it may seem like a hurdle of paperwork, it serves a vital purpose: ensuring that the investment is safe, sound, and financially stable. Whether you are a lender looking to close more loans, an agent trying to protect your commission, or an HOA board member maintaining property values, understanding these guidelines is non-negotiable.
Don’t let a complex review process derail your transaction. Navigating the maze of Fannie Mae and Freddie Mac guidelines requires expertise and precision.
Need help securing approval for your project?
Stop guessing and start closing. Contact Condo Approval Professionals today to streamline your review process and ensure your community is ready for business.
Conventional Condo Project Reviews: Frequently Asked Questions (FAQ)
Q: How long does a Conventional Condo Project Review take?
A: A review typically takes anywhere from 3 to 10 business days, depending on how quickly the HOA or property management company provides the necessary documents. Using a specialized service can often expedite this timeline by ensuring the correct documents are requested upfront.
Q: What happens if a condo project is “Non-Warrantable”?
A: If a project is Non-Warrantable, borrowers cannot use standard conventional financing (Fannie Mae/Freddie Mac). They must seek “Non-Warrantable Condo Loans,” which are portfolio products offered by some banks. These loans often require a higher down payment (20-30%) and carry higher interest rates.
Q: Does a Limited Review require a questionnaire?
A: Yes, usually. Even a Limited Review requires a basic questionnaire to verify that the project is not a condotel, has no major litigation, and meets insurance requirements. However, it does not require the in-depth budget analysis used in a Full Review.
Q: Can a project be approved if it doesn’t have 10% reserves?
A: For a Full Review, the 10% reserve contribution is a hard requirement. However, if the project has a Reserve Study (less than 3 years old) that justifies a lower contribution rate based on the building’s actual remaining life and funding status, Fannie Mae may allow an exception. This is complex and requires expert review.
Q: How long is a Condo Project Approval valid?
A: Once a project is approved through the CPM (Condo Project Manager) system, the approval is typically valid for one year, provided no significant changes (like new litigation or a disaster) occur during that time.