Fannie Mae Tightens Condo Mortgage Underwriting. . . . Again!

Many would say that perhaps Fannie Mae should have become tighter on their guidelines for condos back in 2008 and now that they’re seeing recovery, start to loosen up

stupid-idea

Congratulations Fannie!

(kind of like the private mortgage insurance companies did).  The opposite is happening as clearly Fannie Mae wants to limit their exposure to condos in their portfolio.  Periodically, changes are made to Fannie’s underwriting guidelines and their automated underwriting software.  Some are small and some are large and impactful.  Condo buyers beware as they snuck this one in (effective October 20th):

“A limited project review will no longer be permitted on principal residences in condominium projects when the LTV/CLTV/HCLTV is greater than 80%. DU will require a full project review on principal residences in condominium projects when the LTV/CLTV/HCLTV is greater than 80%.”

It seems pretty innocuous but this will have meaningful consequences on a lot of transactions.  For instance as of right now, there is only one publically Fannie Mae approved condo project in the state of MN and last year 23.9 percent of the Twin Cities transactions were condo/townhouse.  How’s that for a lot?

Going forward, regardless of whether or not a condo project is established, these loans will no longer be eligible for limited reviews (sometimes referred to as Spot Approvals) and must go through full review.  Secondary market mortgage lenders are implementing this change now so be ready for its consequences.

A typical checklist for a Fannie Mae full review for condo projects would be as follows:

  • Appraisal Report
  • Conventional Condominium/PUD Warranty
  • Conventional Condominium HOA Questionnaire – here’s a sample
  • Copy of the Declaration Page of the Master Insurance Policy and evidence of Fidelity Insurance, if applicable
  • Current Operating Budget (typically not required for 2-to 4-unit projects)
  • Engineer’s Report, description of renovations and rehabilitation (if applicable)
  • Management Contract
  • Agreement of Sale

For examples of ineligible project characteristics, click here, and for a copy of the Fannie Mae announcement regarding condos needing full review where the down payment is less than 20 percent, click here.  For a full list of approval options, click here.  If you think that having the project approved FHA will make this easier; it won’t.  If you think one lender’s project approval will be shared for others to use in the same way as FHA DELRAP condo approval; don’t count on it (it’s optional so don’t look to lenders to voluntarily expose themselves to risk).

This does not mean that there will be an onslaught of loan declines.  More than likely it will only create more work for association managers, Realtors, loan officers, processors and underwriters.  Worst of all, it will add extra steps and between 2 and 7 days, depending on the competence of the lender and association management, to an already long and overly tedious process.

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI

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