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Associations Need to be Prepared for Mortgage Lenders’ Inquiries About Structural Issues, Significant Deferred Maintenance and Unsafe Conditions Following New Fannie Mae Requirements

Posted: 01/14/2022
Industries: Condominium and Community Associations

For many years, associations and their managers have responded to questionnaires from mortgage lenders that seek information about the condominium association to help the lender determine whether a loan to a unit owner or buyer will meet Fannie Mae’s requirements for federally guaranteed loans.

What You Need to Know:

  • Fannie Mae updates eligibility requirements for community association loans
  • Managers and boards should expect questions about structural issues, significant deferred maintenance and unsafe conditions during sales
  • Associations should expect lenders to ask whether at least 10 percent of the annual budget is pledged for reserves

​In response to concerns arising out of the collapse of the Champlain South Tower in Surfside, Florida, Fannie Mae recently tightened its eligibility requirements for mortgages on condominium units to deny eligibility to units in associations with significant deferred maintenance or unsafe conditions. In order to help determine whether associations meet those new requirements, Fannie Mae has supplemented its HOA Questionnaire form to include questions about those matters.

Structural Soundness, Significant Deferred Maintenance and Unsafe Conditions
The three-page Addendum that has been added to Fannie Mae’s HOA Questionnaire form seeks information about structural integrity, the existence of significant deferred maintenance, and related matters. Associations and their managers should expect to be asked to answer those questions by lenders, particularly when there are significant special assessments. Some of the questions that associations are likely to be asked include: 

  • Has the building been professionally inspected for safety, soundness, structural integrity and habitability? If so, what were the results of such inspection?
  • If deficiencies exist, when will they be corrected? 
  • Are there any outstanding Code violations? 
  • Has the association obtained a reserve study within the past three years?
  • Has the association obtained any loans to finance improvements or deferred maintenance? If so, what is the amount and terms of the loan? 

These are questions that associations have not previously had to address for mortgage lenders or in Section 22.1 disclosures in connection with unit sales. Responding to these questions should not pose significant problems for well-maintained associations that are free from serious structural issues and have properly funded reserves. However, associations with serious structural problems or significant deferred maintenance should anticipate significant inquiry from lenders, and unhappy mortgage loan applicants.

Reserve Requirements
Fannie Mae requires that an association contribute at least 10 percent of its annual budget to its replacement reserve. In the past, this reserve funding requirement could be waived if an association had a reserve study supporting a lower reserve contribution. However, this special exception is no longer available. Therefore, associations should also expect lenders to ask whether at least 10 percent of the association’s annual budget is contributed to its replacement reserve. 

Regardless of whether a lender uses Fannie Mae’s HOA Questionnaire form or its own questionnaire form that incorporates the substance of Fannie Mae’s new requirements, associations and their managers should anticipate the need to provide additional information to mortgage lenders.

Please contact us if you have questions or require assistance in responding to requests from lenders.