Big Changes to Condo Rules

On June 5th, Fannie Mae announced a significant list of changes to their condo project policies. These updates open the door to Fannie Mae financing on many projects that were previously ineligible.

I know this post may seem a little boring and “inside baseball”, so let me start by saying this is a Really Big Deal. I’m excited about these changes for so many reasons:

Increased value for affected projects

Condos in projects not eligible for Fannie Mae financing (“non-warrantable” projects) require portfolio lending — generally with significantly less favorable terms (a bigger down payment, a higher rate, and/or an adjustable rate). Restricted access to financing depresses values in these projects. Owners in projects like The Cornerstone (a significant number of affordable housing rentals) Milepost 5 (an artists’ community of live-work spaces) should enjoy improved marketability and value. Buyers will enjoy increased access to affordable financing for a wider number of condos.

Plex conversions

Eliminating condo project review of 2 to 4 unit projects creates an increased incentive to convert duplexes, triplexes and fourplexes into small condo projects. This creates the opportunity for small-scale condo developments. And for owners of multi-unit properties, condo conversion is an interesting way to add value that also offers creative exit strategies. Convert a fourplex to condos and sell units off (or exchange them) one at a time. Convert a duplex, sell one unit to pay off the mortgage and keep the other as rental, owned free and clear.

Clarity = expanded willingness to lend

Fannie Mae has clarified a number of guidelines. The old guidelines required underwriters make a subjective judgement call as to whether a live work unit met Fannie rules or a condo in a resort community might be considered an ineligible condotel. Wherever an underwriter can’t be certain, they generally say “no”. By removing some grey areas, Fannie Mae has made it easier for underwriters to say “yes”. Let’s take a look at some of the exciting (to me anyway) details:

Single-entity Ownership

Old rule:  Fannie Mae would not finance a unit in a project where a single entity (individual, investor group, partnership or corporation owned more than 10% of the units in a project of 21 units more, 2 units in a project of 5 to 20 units or 1 unit in a project with 2 to 4 units.

New rule: A project is now allowed to have up to 20% of the units in a project of 21 units or more or 2 units in a project of 5 to 20 units owned by one entity. 2 to 4 unit properties have no entity ownership rules. Additionally, units owned by non-profits, schools or affordable housing programs are not included in entity-ownership calculations.

And better yet, this rule can be waived for a purchase transaction that reduces the single-entity ownership percentage, so long as no more than 49% of the units are owned by one entity and there are no delinquent dues, pending or active special assessments.

2 to 4 unit projects

Old rule:  Fannie Mae applied most of their normal condo rules to 2 to 4 unit projects.

New rule: Most normal condo guidelines are waived. The only requirements are that the project not be classified as a “condotel” and that master insurance policy and flood insurance guidelines are met. No other rules apply.

Commercial space

Old rule: No more than 25% of the building in which the project is located could be commercial space or allocated to mixed-use. This included above and below grade space and commercial parking use.

New rule:  Allowable commercial space has been increased to 35% and now excludes commercially owned/operated parking space. A three story building with ground floor commercial and two floors of condos above is now eligible for a Fannie Mae loan.

Limited review

Old rule: Only primary and secondary residence transactions were eligible for “limited review” of the project.

New rule:  Investment property transaction up to 75% loan-to-value ratio are now eligible for limited review, streamlining the closing process. A limited review can also allow a lender to not ask certain questions that, if answered, could pose a problem.

FHA approval accepted by Fannie Mae

Old rule:  FHA approval had no bearing on Fannie Mae acceptance.

New rule:  Fannie Mae will now accept projects approved by FHA’s HUD Review and Approval Process (HRAP).

Legal Non-Conforming Zoning Permitted

Old rule:  Projects that represented a legal, but non-conforming, use of the land were ineligible if zoning regulations prohibited rebuilding the project at current density in the event of partial or full destruction.

New rule:  Legal non-conforming use is permitted so long as the appraiser comments on the market response to the use relative to the zoning.

Condotel Clarification

Old rule:  Fannie Mae prohibited financing in projects with one or more “condotel” features, including: hotel or motel conversions, registration service with daily rentals, restrictions to the owner’s ability to occupy their unit and/or mandatory rental pooling agreements.

New rule:  Fannie Mae has clarified their definition of a condotel to be a project with any of the following features: licensed or managed as a hotel, motel or resort, restricts the owners ability to occupy the property during any part of the year, requires rental pooling (daily or otherwise) or requires that unit owners share profits with the HOA, management company or resort rental company.

Live-Work Projects

Old rule:  Fannie Mae used to allow financing of live-work condos only when the project was largely residential, units were occupied as primary residences with incidental small business use, there was minimal space and modifications for commercial use, the project documents stated commercial use was allowed but defined the type of commercial use.

New rule:  Projects are now eligible for financing so long as the project is primarily residential in nature and complies with local zoning rules for live-work spaces.

Established Project Definition

A project is considered established (and therefore subject to less stringent eligibility criteria) so long as 90% of the units are conveyed, the project is 100% complete (units and common elements), there is no additional phasing and control of the HOA has been turned over to the owners.

The old rules still apply, but a project can additionally now be considered established if less than 90% of the units are conveyed so long as the shortage is due to the developer holding back units as rentals. Construction must be 100%, the developer’s share of the units cannot be more than 20% of the total units, the fees must be paid current on the developer-held units and there cannot be any active or pending special assessments.  

Waiver of Project Review

In overhauling their condo eligibility rules, Fannie Mae also took the chance to create a list of projects exempt from project review. Exempt from review are:

• Detached condo units – A detached condo is one that is completely free-standing and detached from other condo units in the project (including walls, ceilings, floors, breezeways or garages). These condos can be in projects made solely of detached condos or in projects with a mix of detached and attached units.

• Units in 2 to 4 unit projects – Condos in new or established projects with 2 to 4 units are exempt from project review.

• Fannie to Fannie limited cash-out refi – Project review is also waived on a refinance if Fannie Mae owns the loan being refinanced, so long as there is no cash back to the borrower and loan is at or below 80% of the value of the property.

Call the condo experts at Guaranteed Rate

If you are considering purchasing a condo, please give us a call (503-799-3711) or email (juleef@rate.com). We will make sure you understand your options and secure a great loan at a low rate.

Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.

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