Condominium Lending - 2023 Freddie Mac Guidelines
As the largest source of mortgage funds in the United States, Freddie Mac has been the go-to lender for individual borrowers, developers, and builders in single-family housing since the 1970s. The company has recently announced its 2022 guidelines for condominium lending, which will provide significant changes to conventional condominium lending moving forward.
If you’re considering making a condominium mortgage, the Freddie Mac guidelines scheduled to be effective in February 2022 will affect your final decision. These rules and regulations make it easier for lenders to make loans on this type of property. They also aim to help borrowers get approved more efficiently and keep payments reasonable.
While these guidelines aren't entirely finalized, they provide valuable insight into how mortgage lending is headed and can help you prepare yourself and your company to take advantage of them when they come into effect. Here are some important things to note regarding condo lending under the 2022 Freddie Mac guidelines.
Projects In Need of Critical Repairs
Loans secured by units in condos or co-op projects needing significant repairs aren't qualified for sale to Freddie Mac. Critical repairs are rehabilitation and replacements that significantly affect the safety, soundness, structural integrity, or habitability of the project's building or impact the condo's value, financial viability, or project marketability. These critical repairs and replacements include but aren't limited to:
- Material Deficiencies
- Severe deferred maintenance
- Any life safety hazards
- Violations of federal, state, or local law, regulation, or code associated with zoning, subdivision, usefulness, construction, housing accessibility, health affairs, or fire safety
Permitted sources of documentation to decide if a project requires critical repairs include but aren't limited to:
- Reserve analyses
- Engineer's report
- Latest HOA (homeowners' association) or cooperative board meeting minutes
- Inventory of critical repairs delivered by the HOA, cooperative corporation, or any management company
- Other considerably similar records
Freddie Mac Condo Terminology
Infringements of state or regional law, ordinance, or code, as mentioned in the description of the critical repairs, include failure by the HOA or cooperative corporation to schedule an inspection. This inspection is typically required by the relevant jurisdiction and any demand from a regulatory authority or assessment agency to make vital building restorations.
Projects that require critical repairs remain unqualified until the demanded repairs, and assessment reports have been made and recorded. Sellers must analyze an engineer's statement or any similar document to specify if the repairs fixed the building's safety, stability, structural integrity, and habitability concerns.
However, these are just temporary requirements and don’t apply to:
Damage or deferred maintenance to one or more units in the project provided no effect on general safety, stability, structural integrity, or condo habitability.
- Regular repairs and maintenance
Several Terms Used in the New Freddie Mac Guidelines
These are the unresolved flaws you can't reasonably handle by standard operation or regular maintenance. These include:
Any mold, water damages, or potentially damaging leaks to the subject building
Deficiencies that, if left unaddressed, have the potential to contribute to a severe element or system failure within a year
- Deficiencies that'll likely result in a substantial escalation of the restoration cost related to material building components—approaching have reached, or exceeded—their expected useful life. This also applies to those materials whose remaining useful life shouldn't be relied upon according to age, excessive wear & tear, abuse, inadequate maintenance, and exposure to natural or artificial elements.
Significant Deferred Maintenance
Deferred maintenance is the postponement of regular maintenance, which you can't resolve by ordinary operations or standard maintenance. This postponement may cause any of the following:
- Increased operating costs
- A decrease in property value
- Progressive physical deterioration
- Lack of complete function or efficiency
Routine Repairs and Maintenance
Refers to any repairs and maintenance expected to be conducted by the project in the typical course of business and is minor in cost. These repairs aren't considered critical since they include work that is:
Minor deficiencies with an expense of $3,000 or less per restoration item that doesn't merit prompt attention but needs repairs or replacements that should be complete within the next twelve months
Planned repairs and maintenance that are entirely financed may have a cost that exceeds $3,000 and will be embarked within the next twelve months.
Concentrated on keeping the project performing flawlessly and serviceable
Executed within the project's average operating budget
The work is conducted by on-site staff.
- Often naturally preventive.
The new guidelines suggest that any existing or scheduled special assessment must be examined to determine the acceptability. This applies even if the appraisal is paid fully for the subject condo. It's also applicable to any approved assessment, even if the board hasn't prompted collection yet.
Here the lender must determine the following:
For existing special assessments - the total amount is a reasonable allocation or, for scheduled special inspections, there's adequate cash flow to finance the cause for the thorough review.
The amount budgeted to be gathered year-to-date has been collected for the existing special assessment.
- The cause for the special assessment and total amount assessed.
To determine that the portion budgeted to be collected year-to-date (YTD) has been gathered:
The Seller must examine an income report or a copy with YTD budgeted and definite amounts for the special assessment.
The record should be dated within ninety days of the project assessment date.
- A shortfall between the budgeted and exact YTD amounts for the special assessment must not exceed 5%.
Note: Special assessments with over ten monthly payments remaining must appear in analyses for the monthly housing expense-to-income ratio and be recorded in the Mortgage file.
Freddie Mac isn't modifying reserve conditions for any project assessment types. Sellers may continue relying on a working cash-on-hand budget for new condominium projects. As a seller, you may also rely on a reserve study for both established and new projects when the project's funding provides less than 10% replacement reserves.
The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, has announced its expectations of temporary guidelines in condominium lending. These guidelines are not legally binding, but they're used as benchmarking by many banks and lenders when looking at structuring loans or determining down payments or incomes. If you're considering buying a condominium, it's essential to be familiar with the 2022 Freddie Mac guidelines to determine if you qualify for the lending program.