The Principle Criteria of Condominium, Planned Unit Development, and Cooperative Project Underwriting

Fannie states, "The quality of mortgages secured by units in condo, co-op, and planned unit development (PUD) projects can be influenced by certain characteristics of the project or by the project as a whole. Before delivering a loan secured by an individual unit in a project, the lender must determine that the project meets Fannie Mae's eligibility requirements.

Project eligibility risk is a risk that is distinct from the credit risk presented by individual borrowers. Units located in a project present risks that are also distinct from the risks associated with properties that are not part of a homeowners’ association (HOA) or project.

These risks include the following:

• the financial stability and viability of the project;
• the condition and marketability of the project;
• limitations on the unit owner’s ability to control the decision-making for the project, occupy the unit, or utilize the project’s amenities and common elements;
• dissolution of the project and the unit owner’s resulting rights and responsibilities;
• project-level litigation;
• project-level misrepresentation and fraud;
• the inability to cure a mortgage default due to restrictions in the project documents such as, but not limited to, right of first refusal provisions; and
• insurance coverage that is inadequate to protect the project from unexpected losses."

Lenders are required to underwrite the entire condominium project, not just the unit. This is a common misconception. The unit is only one part of the whole risk. Please keep in mind, The components below are primarily concerned with condominium projects. There are four principle components of project underwriting and they are:

1. Occupancy
2. Established or New
3. Loan to Value Ratio
4. Geography

The first is Occupancy. It is connected with the transaction's Loan to Value ratio. For an established primary residence condominium project with an LTV of 90% a Limited Review is allowed. Second home and Investment occupancy have lower LTV ratios as seen below:

The second is whether or not the project is established or new. Newer projects have a much harder time getting approved than established projects. Read further B4-2.2-03, Full Review: Additional Eligibility Requirements for Units in New and Newly Converted Condo Projects. Fannie states, "To be eligible for a Limited Review, the unit securing the mortgage must be an attached unit in an established condo project." As soon as the lender discovers the project is new, then a Full Review is required (with some exceptions, B4-2.1-02, Waiver of Project Review)

The third is Loan to Value ratio. This ratio usually trumps every other element of project standards review method. Often, when the ratio is high, it is a Full Review or even an ineligible project due to the risk found in combination with the other principle criteria. For example, the subject is an established investment residence condominium in Florida with an LTV of 90% Due to the LTV in combination with occupancy, the subject transaction is ineligible. A PERS review cannot be done (and lenders often do not want to pay for them) and a Full Review cannot be done. The transaction is declined or a reduction in LTV is required to move forward.

The fourth is Geography. At this time, Fannie Mae and Freddie Mac only recognize Florida to be the fourth factor in Project Standards review criteria. Other states or territories may be added in the future based on review by the agencies. Either way, Florida is a high risk based on its history of fraud, occupancy, financial status, and natural disasters. It is altogether a higher risk which is why the agencies have an entire section in their guides dedicated to geographical consideration. Read further on B4-2.2-04, Geographic-Specific Condo Project Considerations.