B4-2.1-03, Ineligible Projects (11/06/2024)

Fannie Mae will not purchase or securitize mortgage loans that are secured by units in certain condo or co-op projects if those projects have characteristics that make the project ineligible. Such characteristics are described in the table below, with additional details provided in the sections that follow. All eligible projects must be created and remain in full compliance with state law and all other applicable laws and regulations of the jurisdiction in which the project is located.

Note: Loans secured by units in projects with a status of "Unavailable" in Condo Project Manager (CPM) are ineligible for purchase by Fannie Mae. If a lender determines that a project does not meet all of Fannie Mae’s project eligibility requirements but believes that the project has merit and warrants additional consideration, the lender may request an exception (see B4-2.2-07, Projects with Special Considerations and Project Eligibility WaiversB4-2.2-07, Projects with Special Considerations and Project Eligibility Waivers, for additional information).

A project may not be operated or managed as a hotel, motel, or similar commercial entity as evidenced by meeting one or more of the following criteria:

• The HOA is licensed as a hotel, motel, resort, or hospitality entity.

• The HOA or project’s legal documents restrict owners’ ability to occupy the unit during any part of the year.

• The HOA or project’s legal documents require owners to make their unit available for rental pooling (daily or otherwise).

• The HOA or the project’s legal documents require unit owners to share profits from the rental of units with the HOA, management company, or resort, or hotel rental company.

In addition to the requirements above, any project with one or more of the following characteristics is ineligible. The project

• is primarily transient in nature;

• offers hotel type services (including those offered by or contracted through the HOA or management company) or characteristics such as registration services, rentals of units on a daily or short-term basis, daily cleaning services, central telephone service, central key systems and restrictions on interior decorating;

• is a conversion of a hotel (or a conversion of a similar type of transient housing) unless the project was a gut rehabilitation and the resulting condo units no longer have the characteristics of a hotel or similar type of transient housing building;

• is subject to voluntary rental-pooling, revenue, profit or commission sharing agreements with the HOA or management company, or similar agreements that restrict the unit owner’s ability to occupy the unit such as blackout dates and occupancy limits to assure an inventory of units for rent on a frequent basis. This may include daily, weekly, monthly or seasonal restrictions;

• is professionally managed by a hotel or resort management company that also facilitates short term rentals for unit owners or projects with management companies that are licensed as a hotel, motel, resort, or hospitality entity;

• is deemed to be ineligible under Freddie Mac’s requirements because of condo hotel, resort, transient or short-term rental activity;

• has a legal or common name that contains hotel, motel, or resort, unless the use of hotel, motel, or resort is a reference to a historical use of the building and not reflective of its current use as a residential condo or co-op project;

• is marketed as a hotel, motel, resort or investment opportunity; or

• has obtained a hotel or resort rating for its hotel, motel, or resort operations through hotel ratings providers including, but not limited to, travel agencies, hotel booking websites, and internet search engines.

The following criteria are examples of some common red flags. The lender should perform additional due diligence of the project when any of these characteristics are present:

• 75% or more of the units are owned as investment and second home occupancy - especially when the loan transaction is not a principal residence transaction;

• units that do not contain full-sized kitchen appliances;

• advertisements for daily or short-term rental rates;

• franchise agreements;

• location of the project in a resort area;

• units that are less than 400 square feet;

• amenities that are common in hotels or resorts including spa services, concierge services, rentals of recreational equipment or amenities, childcare services for short-term renters, scheduled social or entertainment activities for short-term renters, airport shuttles, ski lift shuttles or ski lift and trail passes, or other vacation amenities and packages; or

• interior doors that adjoin different units.

Projects with covenants, conditions, and restrictions that split ownership of the property or curtail an individual borrower’s ability to utilize the property are not eligible for delivery to Fannie Mae. These types of properties include, but are not limited to, the following:

• “common interest” apartments or community apartment projects that are projects or buildings owned by several owners as tenants-in-common or by an association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building;

• projects that restrict the owner’s ability to occupy the unit, even if the project is not being operated as a motel or hotel; and

• projects with mandatory rental pooling agreements that require unit owners to either rent their units or give a management firm control over the occupancy of the units.

  • These are formal agreements between the developer, association, and/or the individual unit owners that obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis. In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such use restrictions. In return, the unit owner receives a share of the revenue generated from the rental of the unit.

Projects that contain multi-dwelling units are not permitted. These projects allow an owner to hold title (or share ownership and the accompanying occupancy rights) to a single legal unit that is sub-divided into multiple residential dwellings within the single legal unit, with ownership of the unit (or shares) evidenced by a single deed and financed by a single mortgage (or share loan). The sub-divided units are not separate legal units. This restriction applies regardless if the unit owner maintains one or more of the sub-divided units as rental units or uses one or more of the sub-divided units as accessory or lock-out units.

This provision does not apply to condo or co-op projects that allow an individual to buy two or more individual legal units with the intent of structurally and legally combining the units for occupancy as a single-unit dwelling. Mortgages secured by units in these types of projects are eligible for purchase and securitization by Fannie Mae provided all of the following requirements are met:

• The unit securing the mortgage represents a single legal unit under a single deed.

• Any construction or renovation to structurally combine units has no material impact on the structural or mechanical integrity of the project’s buildings or the subject property unit.

• The individual units must be fully described in the legal description in the mortgage and under a single deed.

• The project’s legal documents must have been amended to reclassify the combined units as a single unit in the project.

• All structural renovation to physically combine the units must be completed.

A condo or co-op unit with an accessory unit may be eligible on a case-by-case basis with a Fannie Mae PERS Project Approval or a loan-level project eligibility waiver. See B4-2.2-07, Projects with Special Considerations and Project Eligibility WaiversB4-2.2-07, Projects with Special Considerations and Project Eligibility Waivers, for additional information on submitting an exception request.

Fannie Mae acquires mortgage loans secured by real estate. Houseboats, boat slips, cabanas, timeshares, and other forms of property that are not real estate are not eligible for delivery to Fannie Mae. The marketability and value of individual units in a project may be adversely impacted by the inclusion of non-real estate property such as houseboats, timeshares, and other forms and structures that are not real estate. As such, projects containing these other non-real estate forms of property are not eligible.

Boat slips, cabanas, and other amenities are permitted when owned in common by the unit owners as part of the HOA.

Mortgages secured by units in a project that operates, either wholly or partially, as a continuing care community are ineligible for delivery to Fannie Mae. These communities or facilities are residential projects designed to meet specialized health and housing needs and typically require residents to enter into a lifetime contract with the facility to meet all future health, housing, or care needs. These communities may also be known by other names such as life-care facilities.

Projects that make continuing care services available to residents are eligible only if the continuing care facilities or services are not owned or operated by the HOA and residential unit owners are not obligated to purchase or utilize the services through a mandatory membership, contract, or other arrangement.

Continuing care communities are not the same as age-restricted projects. Age-restricted projects that restrict the age of residents but do not require residents to enter into a long-term or lifetime contract for healthcare and housing as the residents age are eligible.

A condo project is ineligible if the HOA is receiving more than 10% of its budgeted income from non-incidental business arrangements related to the active ownership and/or operation of amenities or services available to unit owners and the general public. This includes, but is not limited to, businesses such as a restaurant or other food- and beverage-related services, health clubs, and spa services.

Non-incidental income from the following sources is permitted provided the income does not exceed 15% of the project’s budgeted income:

• income from the use of recreational amenities or services owned by the HOA for the exclusive use by unit owners in the project or leased to another project according to a shared amenities agreement (as noted below), or

• income from the leasing of units in the project acquired by the HOA through foreclosure.

The single-entity ownership limits (described above) will apply to the number of units owned and rented by the HOA.

Fannie Mae requires that no more than 35% of a condo or co-op project or 35% of the building in which the project is located be commercial space or allocated to mixed-use. This includes commercial space that is above and below grade. Note that projects located in Special Flood Hazard Areas with commercial space greater than 25% of the project’s square footage, including any commercial parking facilities, may need supplemental or private flood insurance policies to meet Fannie Mae’s requirements for flood insurance. Coverage under the National Flood Insurance Program may provide inadequate coverage for projects with commercial space in excess of 25%. See B7-3-06, Flood Insurance Requirements for All Property TypesB7-3-06, Flood Insurance Requirements for All Property Types for additional information.

Any commercial space in the project or in the building in which the residential project is located must be compatible with the overall residential nature of the project.

Note: Rental apartments and hotels located within the project must be classified as commercial space even though these may be considered “residential” in nature. Commercial parking facilities can be excluded from the commercial space calculation.

Calculation of Commercial Space. Commercial space allocation is calculated by dividing the total non-residential square footage by the total square footage of the project or building. Lenders are responsible for determining the total square footage of the project, the square footage of the non-residential space, and the residential space square footage. This calculation includes the total square footage of commercial space even if the residential and commercial owners are represented by separate associations.

Non-residential square footage includes:

• retail and commercial space, and

• space that is non-residential in nature and owned by a private individual or entity outside of the HOA structure.

Examples include, but are not limited to:

• rental apartments,

• hotels,

• restaurants, and

• private membership-based fitness facilities.

Non-residential square footage excludes amenities that are:

• residential in nature;

• designated for the exclusive use of the residential unit owners (such as, but not limited to, a fitness facility, pool, community room, and laundry facility); and

• owned by the unit owners or the HOA.

The following table shows which commercial or mixed-use space must be included in the calculation of the percentage of commercial space.

Loans securing units in condo and co-op projects with mandatory memberships that require the HOA or co-op members to pay dues to a third-party organization (such as a golf course or other recreational facility) are ineligible for sale to Fannie Mae. The project must be the sole owner of its amenities, though certain exceptions will be allowed when there is a shared amenities agreement between HOAs or co-op projects.

Projects subject to recreational leases are also not eligible. A recreational lease is a long-term lease between the HOA and a third party for access to certain recreational facilities for a specified time period and payment. In these scenarios, the owner of the facilities is often the project’s developer or has some financial relationship to the developer and the leases often provide ongoing profit to this party for the duration of the lease. The lease may permit the owner of the facilities to lease the amenities to other parties in addition to the HOA or co-op. The HOA or co-op may have certain financial, insurance, and other legal obligations under the lease that may be burdensome over time. These leases may or may not provide the project long-term access to the amenities beyond the initial lease term.

When an HOA is part of a master association, the lender is required to evaluate whether the subject property’s HOA members are required to participate in a mandatory membership that is managed through the master association. Additionally, the master association may not be subject to recreational leases as described above.

Lenders are encouraged to review the project’s legal documents, sales contract, and budget to identify mandatory memberships and recreational leases. Some red flags that a project may require a mandatory membership, or be a party to a recreational lease, is that the amenities may have some of the following characteristics:

• the amenities have a different name from the residential project and may be recognized as a different legal entity from the HOA,

• owners are required to pay large up-front fees to become a member or have access to the amenities,

• owners are required to pay monthly or periodic dues to the entity that owns or operates the amenities (these dues may be paid directly to the owner or operator or they may be paid to the HOA and passed through to the owner or operator),

• the general public may be able to purchase memberships or access passes for the use of the amenities,

• the amenities can be leased or rented to the public for events not hosted by the HOA or its members, or

• HOA members may be subject to block-out dates or other use restrictions.

Live-work projects are projects that permit individual residential unit owners to operate and run a small business from their residential unit. Units in projects that permit live-work arrangements are eligible for sale to Fannie Mae provided the project complies with all applicable local zoning, program, or statutory requirements for live-work projects and the nature of the project is primarily residential.

Projects in which the HOA or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project are ineligible for sale to Fannie Mae.

If a lender discovers that a project is engaging in pre-litigation activities (such as, but not limited to, arbitration or mediation) that are reasonably expected to proceed to formal litigation; the lender must apply Fannie Mae’s litigation policies. Whether the legal action is resolved through arbitration, mediation, or it proceeds to litigation, there is risk that the project is exposed to material financial hardship related to the matters addressed in the complaint.

If the lender determines that pending litigation involves minor matters with no impact on the safety, structural soundness, habitability, or functional use of the project, the project is eligible provided the litigation meets one or more of the following:

• non-monetary litigation including, but not limited to neighbor disputes or rights of quiet enjoyment;

• litigation for which the insurance carrier has agreed to provide the defense, and the amount is covered by the HOA's or co-op corporation's insurance;

• the HOA or co-op corporation is the plaintiff in the litigation and upon investigation and analysis the lender has reasonably determined the matter is minor and will result in an insignificant impact to the financial stability of the project;

• the reasonably anticipated or known damages and legal expenses are not expected to exceed 10% of the project’s funded reserves;

• the HOA or co-op corporation is seeking recovery of funds for issues that have already been remediated, repaired, or replaced and there is no anticipated material adverse impact to the HOA or co-op corporation if funds are not recovered;

• litigation concerning localized damage to a unit in the project that does not impact the overall safety, structural soundness, habitability, or functional use of the project; or

• the HOA or co-op corporation is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due HOA or co-op assessments.

Litigation that involves personal injury or death does not meet Fannie Mae’s criteria for minor litigation unless

• the claim amount is reasonably anticipated or known,

• the insurance carrier has agreed to provide the defense, and

• the reasonably anticipated or known damages are covered by the HOA’s or co-op corporation’s insurance.

Construction defect litigation in which the HOA or co-op corporation is the plaintiff are not considered a minor matter unless the HOA or co-op corporation is seeking recovery of funds for issues that have already been remediated, repaired, or replaced. In addition, there is no anticipated material adverse impact to the HOA or co-op if the funds are not recovered.

The lender must obtain documentation to support its analysis that the litigation meets Fannie Mae’s criteria for minor litigation as described above.

A project meets the definition of single-entity ownership when a single entity (the same individual, investor group, partnership, or corporation) owns more than the following total number of units in the project:

• projects with 5 to 20 units - 2 units

• projects with 21 or more units - 20%

Units currently subject to any rental or lease arrangement must be included in the calculation. This includes lease arrangements containing provisions for the future purchase of units such as lease-purchase and rent-to-own arrangements.

The following may be excluded from the single-entity ownership calculation:

• units that are owned by the project sponsor or developer and are vacant and being actively marketed for sale; or

• units that are controlled or owned by a non-profit entity for the purpose of providing affordable housing, units held in affordable housing programs (including units subject to non-eviction rent regulation codes), or units held by higher-education institutions for a workforce housing program.

The single-entity ownership requirement may be waived when the transaction is a purchase transaction that will result in a reduction of the single-entity ownership concentration. In such instances, the following requirements must be met:

• units owned by the single entity represent no more than 49% of the units;

• evidence is required that the single entity is marketing units for sale to further reduce single-entity ownership, with the goal of reducing the concentration to 20% or less o the project units;

• the single entity is current on all HOA assessments; and

• there are no pending or active special assessments in the project.

Projects in need of critical repairs are those needing repairs or replacements that significantly impact the safety, soundness, structural integrity or habitability of the project's building(s), or the financial viability or marketability of the project. Critical repairs include conditions such as:

• material deficiencies, which if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
• any mold, water intrusions or potentially damaging leaks to the project's building(s);
• advanced physical deterioration;
• any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, and habitability; or
• any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment).

Examples of some items to consider include, but are not limited to, sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.

If damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity, or habitability of the project, then these requirements do not apply.

Routine repairs are not considered to be critical and include work that is:

• preventative in nature or part of normal capital replacements (for example, focused on keeping the project fully functioning and serviceable); and
• accomplished within the project's normal operating budget or through special assessments that are within guidelines.

A project with an evacuation order due to an unsafe condition, either for a partial or total evacuation of the project's building(s), is ineligible until the unsafe condition has been remediated and the building(s) is deemed safe for occupancy.

Special Assessments

Special assessments may be current or planned. Lenders must obtain and review the following information for each special assessment to determine if it addresses a critical repair:

• what is the purpose of the special assessment,
• when was the special assessment approved and is it planned (approved by the unit owners, but not yet initiated by the board) or already being executed,
• what was the original amount of the special assessment and the remaining amount to be collected, and
• when is the expected date the special assessment will be paid in full.

If the special assessment is associated with a critical repair and the issue is not remediated, the project is ineligible.

Inspection Reports

If a structural and/or mechanical inspection was completed within 3 years of the lender's project review date, the lender must obtain and review the inspection report. The report cannot indicate that any critical repairs are needed, no evacuation orders are in effect, and no regulatory actions are required.

If the inspection report indicates there are unaddressed critical repairs, the project is ineligible until the required repairs have been completed and documented accordingly. The lender must review an engineer's report or substantially similar document to determine if the repairs completed have resolved the safety, soundness, structural integrity, or habitability concerns of the project.

Documentation

Lenders may need to review a combination of documents to determine if a project meets Fannie Mae's physical condition requirements. Lenders are responsible for determining which documents are needed to ensure compliance with the requirements of this Guide. Some examples of this documentation include, but are not limited to:

• HOA board meeting minutes,
• engineer report(s),
• structural and/or mechanical inspection reports, 
• reserve studies,
• a list of necessary repairs provided by the HOA or the project's management company,
• a list of special assessments provided by the HOA or the project's management company, and
• other substantially similar documentation.