Watch Your Step Crossing the Fannie and Freddie Lending Minefield

In an earlier article, we explained that when deciding whether to lend money to potential buyers or to unit-owners who want to refinance their mortgage in a condominium, lenders follow guidelines issued by federally backed Fannie Mae and Freddie Mac. These guidelines can seem like a minefield. While some of the guidelines present unavoidable pitfalls – such as those pertaining to litigation – others can be avoided if condo boards understand them and take steps to circumvent them. Here are some of the big ones:

Owner-concentration thresholds. In condominiums with more than 20 units, boards should not allow an individual or a single entity to own more than 25 percent of the units; in condominiums with 5 to 20 units, no more than two units; and in condominiums with four or fewer units, no more than one unit. Developer-owned vacant units for sale do not count toward the threshold, but occupied unsold units do. Boards should consider exercising their right of first refusal to prevent sales that would result in noncompliance, and amending their bylaws to prohibit non-compliant owner concentrations. 

Owner-occupancy thresholds. Boards should ensure that at least 50 percent of the units are owner-occupied. (The thresholds vary for condominiums with four or fewer units.) To be considered owner-occupied, a unit must be the owner’s primary residence or a secondary home, rather than an investment property, such as a rental. Boards should track owner-occupancy rates and reject rental applications if the 50-percent threshold will be crossed. Boards should also consider adopting bylaw amendments limiting the number of units available for rent at a given time, and they should ask about the intended use of the unit on their purchase application. Boards can consider exercising their right of first refusal when a purchaser intends to use the unit as an investment property. 

Budget requirements. With the exception of condominiums with four units or fewer, boards must ensure that their budgets include the following: appropriate assessments to manage the condominium; appropriate allocations for line items pertinent to the condominium’s type and status; adequate funding for insurance deductibles; and a line item of at least 10 percent of the budget for replacement of reserves for capital expenditures and deferred maintenance. The cost of these expenditures should be based either on a reserve study or on the condominium’s age and estimated life and replacement cost of the major common elements.

Unpaid common charges. In established condominiums, no more than 25 percent of the units may be delinquent in the payment of common charges. In new condominiums, the threshold is 15 percent. No delinquency is allowed in condominiums with four or fewer units. A unit-owner is considered delinquent after 60 days in arrears. The Condominium Act grants boards the right to put a lien on a unit after common charges are 60 days past due. However, boards can adopt higher standards by amending their bylaws to require action when common charges are 30 days past due, thereby avoiding delinquency. 

These rules are strict, and they have potentially explosive consequences. Read them closely, and watch your step. 

Leni Morrison Cummins, a member of the law firm Cozen O’Connor, specializes in condominium and cooperative law. Rebecca Eschen, an associate at the firm, assisted in the preparation of this article.