Buying a US condo or HOA home: what lenders check about the project

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Kooky

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A buyer who finances a detached house in the United States is underwritten twice: once as a borrower and once through the property. A buyer of a condominium unit is underwritten a third time, through a party that never signs the loan. The owners' association, its budget, its building and its legal papers are all read by the lender, and a unit in perfect order can be refused financing because of something in the association's file.

This guide follows the federal and federally backed sources that set those tests. It covers how Fannie Mae's Selling Guide defines the kinds of project, which association documents its rules send a lender to, the two money tests on reserves and late payers, the rule on critical repairs and special assessments, the other features that make a project ineligible, the Federal Housing Administration's separate approval route, how dues enter the monthly housing expense and the Loan Estimate, and how far an association's claim for unpaid dues may rank ahead of the mortgage. It ends with what those sources leave to other documents.

Fannie Mae Selling Guide, Full Review Process and topic B4-2.1-03, both dated 5 August 2026.

Three kinds of project, three kinds of ownership

Fannie Mae's Selling Guide, the rulebook for loans the company buys from lenders, separates three structures in its general topic on project standards, B4-2.1-01, dated 5 August 2026.

A planned unit development, or PUD, is defined there as a project or subdivision made up of common property and improvements that are owned and maintained by a homeowners association, the HOA. The owner holds title to the lot and the structure on it, and also holds an interest in the association. This is the usual legal shape of a house or townhouse in an HOA community.

A co-op works differently. A corporation or a trust holds title to the whole property. A buyer purchases shares that stand for one apartment and receives a proprietary lease as evidence of the right to live there.

The condominium sits between the two, and the guide spends most of its effort on it. The topic does not offer one general definition of a condo project. It sorts condo projects instead into established and new. An established project is one where at least 90% of the units have been conveyed to purchasers, the project is 100% complete, no further phasing or annexation is possible, and control of the association has passed from the developer to the unit owners. A project is new when any one of those points is missing: fewer than 90% of units conveyed, construction unfinished, a recent conversion, further phases to come, or a developer still in control. The guide adds that a development declared as a horizontal property regime is treated as a condo unless local statute allows a PUD and the legal documents expressly say that it is one.

The label decides how much scrutiny follows. Under the same topic, project review is waived for PUD units and for detached condo units, although basic requirements still apply. It is also waived for condo projects of two to four units, and for projects of five to ten units that are not part of a larger development. An attached condo unit in a new, newly converted or established project goes through what the guide calls a Full Review, carried out with the company's Condo Project Manager tool, known as CPM.

The association's papers and what each one shows

The Selling Guide never asks a lender to judge a project by sight. Its ineligible projects topic, B4-2.1-03, lists the documents a lender may draw on: HOA board minutes, engineer reports, inspection reports, reserve studies, repair lists and lists of special assessments. The Full Review topic adds the budget. The general topic refers throughout to the project's legal documents, which is the guide's umbrella term for the recorded papers that create the project and bind its owners.

The table sets out what the guide looks for in each. The names an association gives its own papers vary from state to state, and the pages read for this guide do not list them.

Two points follow for a buyer. The first is that these are the association's documents, not the seller's, and the lender remains responsible for the accuracy of what it obtains from the HOA or its management company: B4-2.1-01 says so directly, and it requires the lender to keep the project file for as long as it originates loans in the project. The second is timing. The same topic says a Full Review of an established project must have been completed within one year before the date of the mortgage note, and within 180 days for a new project. An approval shown in CPM, or an FHA approval the lender relies on, has to be unexpired on the note date.

The two money tests: reserves and late payers

The Full Review topic, numbered B4-2.2-01 and dated 5 August 2026, sets two financial tests that every attached condo unit under that review has to pass.

The first concerns the replacement reserve, the money an association puts aside for the roof, the lifts and the other parts of the building that wear out. The lender must review the budget and confirm that it is adequate and that it provides for replacement reserves of at least 10% of the budget. The guide gives the arithmetic: the annual budgeted reserve allocation is divided by the association's annual budgeted assessment income, which includes the regular common expense fees. Four kinds of income are left out of the bottom of that fraction: incidental income the project does not rely on, income collected for utilities that owners would normally pay themselves such as cable television or internet, income allocated to reserve accounts, and special assessment income.

A worked example, with invented figures: an association budgets US$600,000 of assessment income for the year after those exclusions, and allocates US$54,000 to replacement reserves. US$54,000 divided by US$600,000 is 9%. The budget falls short of the test. At the same income, the allocation would need to be US$60,000 to reach 10%.

A reserve study can replace that calculation. The guide allows it when the lender obtains the study and keeps its own analysis on file, when the association's funded reserves meet or exceed what the study recommends, and when the budget carries the highest reserve allocation the study recommends. The study, or an update to it, must have been completed within three years of the date the lender approves the project, and it must be prepared by an independent third party with reserve study expertise; the guide gives a credentialed reserve study professional, a construction engineer and a certified public accountant who specialises in reserve studies as examples. One method is ruled out: the guide says the baseline funding method cannot be used to waive the 10% requirement.

The second test concerns the neighbours. No more than 15% of the total units in the project may be 60 days or more past due on their common expense assessments. The guide's own illustration is a 100-unit project, where the limit is 15 units. The same 15% ceiling applies separately to each special assessment.

A worked example on the same lines: in a project of 120 units, 15% is 18 units. If 19 owners are 60 days or more behind, the share is 19 divided by 120, or 15.8%, and the project fails the test although only one owner separates it from the limit.

Critical repairs and special assessments

The rule on the state of the building itself sits in B4-2.1-03. A project in need of critical repairs is ineligible. The topic defines critical repairs as repairs or replacements that significantly affect the safety, soundness, structural integrity or habitability of the buildings, or the financial viability or marketability of the project.

It then lists the conditions that count. They include material deficiencies that could, if left uncorrected, cause a critical element or system to fail within one year; any mould, water intrusion or potentially damaging leaks to the buildings; advanced physical deterioration; and failure of a mandatory state, county or other jurisdictional inspection or certification tied to structural safety, soundness or habitability. The last item is a number: unfunded repairs costing more than US$10,000 per unit that should be undertaken within the next 12 months. Repairs made by an individual owner and repairs funded by a special assessment are left out of that figure. The guide's examples of the building parts in question are sea walls, elevators, waterproofing, stairwells, balconies, foundations, electrical systems, parking structures and other load-bearing structures.

A worked example of the per-unit threshold, with invented figures: an 80-unit building needs US$1,000,000 of balcony work within the next 12 months and has no funding in place. US$1,000,000 divided by 80 units is US$12,500 per unit, above the US$10,000 line. If the unfunded work cost US$640,000, the figure would be US$8,000 per unit and this particular condition would not be met, though the other conditions would still have to be checked.

The topic draws two boundaries around the rule. Damage confined to one or a few units, with no effect on the safety or habitability of the project as a whole, is not covered. And routine repairs are a different thing: preventative work or normal capital replacement, paid for inside the operating budget or through special assessments that stay within the guide's limits.

Special assessments are examined for their own sake. For each one, the lender has to establish four things: its purpose; the date it was approved and whether the work is planned or already under way; the original amount and the amount still to be collected; and the date by which it is expected to be paid in full. The consequence turns on the purpose. If the assessment was raised to pay for a critical repair and that repair remains unaddressed, the project is ineligible. An assessment for work already completed is treated quite differently from one for a defect still in the building.

Inspection reports close the loop. Where a structural or mechanical inspection was completed within three years of the lender's review date, the lender must obtain it and read it. The report must not point to critical repairs, evacuation orders or required regulatory action. Once critical repairs have been identified, the project stays ineligible until they are done and documented, and the topic asks for an engineer's report or a similar document to confirm it. A project under an evacuation order for unsafe conditions is ineligible until it has been remediated and declared safe.

A special assessment tells a lender two things at once: that a defect existed, and whether the building has dealt with it yet.

Other features that close the door

B4-2.1-03 lists 20 types of ineligible project. Several depend on thresholds a buyer can check against the association's papers.

On commercial space, amenities of a residential kind kept for the owners alone, such as a fitness room, a pool or a laundry, are left out of the calculation, while rental apartments and hotels inside the project count as commercial. A building of 100,000 square feet with 38,000 square feet of shops and offices would stand at 38%, as a worked example, and would be over the limit.

On concentration, a 60-unit project could have no more than 12 units in one owner's hands, since 20% of 60 is 12. Developer units that are vacant and actively marketed are not counted, and the topic allows a waiver on a purchase that reduces the concentration when the single owner holds no more than 49% of the units, is marketing them, is current on its own assessments and no special assessment is pending or active.

On litigation, the starting rule is strict: a project is ineligible where the association is a party to pending litigation, or where the developer is in litigation over safety, structural soundness, habitability or functional use. The topic then carves out minor matters. Among them are disputes with no money at stake, claims the association's insurer is defending and covering, actions the association itself brings to collect past-due assessments or to foreclose, and matters where the known or reasonably expected damages and legal costs do not exceed 10% of funded reserves. With funded reserves of US$400,000, as a worked example, that line falls at US$40,000.

The remaining types are about what the project is, not how it is run. A project operated as a hotel or motel is ineligible, and the topic treats any one of four facts as proof: a hospitality licence held by the association, legal documents that restrict an owner's occupancy for part of the year, mandatory rental pooling, or a duty to share rental profits. Timeshares, projects with mandatory dues to a third party such as a golf course, projects in bankruptcy or receivership, and projects whose owners are voting on termination or deconversion are all on the list too.

The FHA route: approved projects and single units

The Federal Housing Administration, part of the Department of Housing and Urban Development, runs its own test. HUD's condominium page says the FHA insures condo loans under Section 203(b) of the National Housing Act, for the purchase or refinance of a one-family unit together with its undivided interest in the common areas, on terms of up to 30 years.

A unit can qualify in two ways. The first is that the project itself holds FHA approval; HUD keeps a public search tool of approved condominiums. Approval requires the project to meet the requirements of HUD Handbook 4000.1 on insurance coverage, financial condition, nature of title, pending legal actions and physical condition. The final rule that set up the present system, published in the Federal Register on 15 August 2019 and effective on 15 October 2019, allows approval either by HUD itself or by a lender holding delegated authority.

The second way is Single-Unit Approval, created by the same rule at 24 CFR 203.43b. It lets the FHA insure a loan on one unit in a project that has no approval. HUD's page gives the conditions: the project must be complete and ready for occupancy, must contain at least five dwelling units and must not be made up of manufactured homes, and it must meet a subset of the project requirements, including FHA insurance concentration, owner-occupancy percentage and financial condition.

The rule fixes ranges and leaves HUD to name the working figure inside each by notice. The minimum share of owner-occupied units may be set between 30% and 75%. The ceiling on commercial space may be set between 25% and 55% of floor area. The share of units in an approved project that may carry FHA-insured loans may be capped between 25% and 75%, and for single-unit approvals the cap may be set between 0% and 20%. On reserves the rule's default mirrors Fannie Mae's in spirit: at least 10% of monthly unit assessments, with a lower amount possible on the strength of a reserve study up to 36 months old. The figures HUD has currently chosen inside those ranges sit in its handbook and notices, which were not among the pages read for this guide.

The two systems meet at one point. Fannie Mae's general topic lists FHA project approval among its own review methods for established attached condo units, so an FHA-approved project can also support a conventional loan under that route.

Dues in the monthly payment and on the Loan Estimate

Association dues affect the loan in a second way, through the borrower's own numbers. Fannie Mae's topic on monthly housing expense, B3-6-03, defines that expense as a sum of parts: principal and interest, property, flood and mortgage insurance premiums, real estate taxes, ground rent, special assessments, owners' association dues, any co-op fee and payments on subordinate financing. Dues are counted with the utility charges that belong to the common areas and without those that apply to the individual unit. For a principal residence, the topic says, this total is the figure used to calculate the borrower's debt-to-income ratio.

A worked example, with invented figures: a buyer's principal and interest come to US$2,100 a month, property tax to US$350 and insurance to US$60. Dues are US$420 and a special assessment adds US$150. The housing expense is US$3,080, of which US$570 comes from the association. The same loan on a house with no association would show US$2,510. The topic gives no ratio limits; those sit elsewhere in the guide.

The Consumer Financial Protection Bureau describes how the money is actually paid. Condo, co-op and HOA fees are usually not part of the monthly mortgage payment, the bureau says: they go straight to the association. A servicer may agree to collect them through the escrow account if asked, but the bureau calls this uncommon. It puts the range of dues at a few hundred dollars to more than US$1,000 a month.

That split shows on the Loan Estimate. Regulation Z, at 12 CFR 1026.37(c), requires the form's Projected Payments table to include an estimate of taxes, insurance and assessments, together with the payments to be made from escrow account funds. The bureau's explainer of the form asks borrowers to check whether any item under Estimated Taxes, Insurance and Assessments is not escrowed, because those costs have to be paid directly, often in large lump sums. The Estimated Total Monthly Payment on the form covers mortgage insurance and escrow where they apply, so an unescrowed association bill sits outside it.

The association's lien and the six-month limit

Fannie Mae's general topic deals with unpaid dues under the heading of priority of common expense assessments. It is the only description of the association's lien among the sources read, and it is given here as Fannie Mae words it.

The topic says Fannie Mae allows a limited amount of regular common expense assessments, typically HOA fees, to take priority over its mortgage lien. This applies, in the topic's words, in jurisdictions that have enacted the Uniform Condominium Act, the Uniform Common Interest Ownership Act or a similar statute giving unpaid assessments priority over first mortgages. The limit is six months of regular assessments, even where the state's law provides for longer. One exception is preserved: where a state's law was enacted on or before 14 January 2014 and gave priority to more than six months, the number of months allowed under that law on that date may have priority, unless the law itself deferred to Fannie Mae's requirements, in which case six months applies again. The project's legal documents must show compliance, and a project that permits a priority lien above these limits appears on the ineligible list.

What these sources leave open

Several things a buyer hears in a condo purchase are not settled by the pages read for this guide, and they are named here so they are not mistaken for rules.

The word "warrantable" does not appear in Fannie Mae's general topic on project standards. The guide speaks of eligible and ineligible projects and of review methods.

The questionnaire a lender sends to the association, and the form it takes, is not described in the three project topics read. They state what the lender must establish, not the paper it uses to ask.

Freddie Mac's own project rules were not read. Fannie Mae's ineligible projects topic refers to them once, treating a Freddie Mac finding that a project is a condo-hotel or has transient or short-term rental activity as a characteristic that counts against it.

The percentages the FHA applies today, and the length of an FHA project approval, depend on HUD's handbook and notices. And every Fannie Mae threshold above comes with exceptions and waivers that turn on the facts of the project, which is why the same building can be eligible for one loan and not for another.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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