Based on the Fannie Mae / Freddie Mac webinar, “Lending Requirements: Real Questions, Real Answers,” featuring Jodi Horne (Principal, Fannie Mae) and Matt Kuisle and Michelle Baldry (Regional Executive Directors, Reserve Advisors).
If you manage or sit on the board of a condo association, you’ve probably heard the buzz about Fannie Mae’s updated reserve requirements. In a recent webinar hosted by Reserve Advisors, Jodi Horne from Fannie Mae joined Matt Kuisle and Michelle Baldry to walk through exactly what’s changing, when it takes effect, and what it means for your budget.
Why Did Fannie Mae Change Their Lending Requirements?
Fannie Mae framed the updated reserve requirements around three “change drivers”:
- Long-term sustainability — the changes are meant to promote long-term homeownership and condo community sustainability.
- Preventing deferred maintenance — adequate reserves reduce the risk that deferred maintenance leads to critical repairs, costly special assessments, or sharp dues increases down the road.
- Protecting affordability — the goal is financially sound, resilient condo communities that remain sustainable and affordable places to live.
In short: higher reserves translate to fewer emergency assessments, deferred maintenance, and collapsed budgets later.
Fannie Mae Retires Limited Review: What It Means for Condo Loans
Before getting into the reserve percentage changes, it helps to understand a bigger structural shift happening at the same time: Fannie Mae has retired the limited review process for new loan applications.
Historically, lenders reviewing condo projects could choose between a full review (or lender-delegated full review) and a limited review. Under the limited review process, lenders weren’t required to obtain a budget or evaluate reserves.
Now, all new loan applications will undergo the full review process, and associations must meet all requirements set forth in the Fannie Mae Single Family Selling Guide. Full reviews consider budgets, funding levels, deferred maintenance and critical repairs, insurance coverage, and more.
New Fannie Mae Reserve Threshold: From 10% to 15%
Fannie Mae currently requires associations to budget at least 10% of annual assessment income toward reserves for a unit in that condo community to be eligible for sale to Fannie Mae. Beginning January 4, 2027, that threshold increases to 15%.
The test itself is simple on the surface: lenders review the association’s budget and check whether the reserve line item equals at least 10% (soon, 15%) of the annual assessment income. If it does, the lender doesn’t need to dig any further into a reserve study just to confirm eligibility.
One requirement worth flagging is already in play. For associations that fall short of the minimum threshold and need to rely on a reserve study to qualify, lenders must confirm the association is actually funding reserves at the highest recommended amount in that study (which must be no more than three years old), and they can no longer accept baseline funding as a basis for an exception. This requirement became active on August 3, 2026.
What is Baseline Funding, and Why Is It Off the Table?
Baseline funding is a reserve methodology that allows an association’s reserve balance to hit zero at some point. It’s essentially a paycheck-to-paycheck approach to reserves, with no cushion for unexpected expenses, which doesn’t hold up well from a risk perspective.
Because of that, if a lender is looking at a reserve study to grant an exception to the 10%/15% rule, they’ll use the highest recommended funding amount in that study, not the baseline number, even if the study presents multiple funding options (baseline, threshold, and fully funded).
Reserve Study Recommendations vs. Fannie Mae’s Minimum: What’s Required?
One important clarification from the webinar: meeting the 10% or 15% requirement through the budget test does not imply that associations must fund at the higher level recommended in a reserve study. That higher number only comes into play if an association is trying to use the reserve study to justify falling below the basic threshold.
That said, 90% of the associations we work with actually need well above 15% (often 20–30%) to be properly funded for long-term capital needs. This means that meeting Fannie Mae’s minimum doesn’t indicate an association is adequately funded, and associations should work toward the fuller recommendation over time, since they will eventually need the money for real repairs. In short, the 15% rule is a lending-eligibility floor, not a funding recommendation.
How Is the 15% Reserve Requirement Calculated?
The math is straightforward:
Reserve contribution ÷ Total budgeted assessment income = Reserve percentage
Here’s the example walked through in the webinar:
With no exclusions, $150,000 ÷ $1.1 million = 13.6%. That clears today’s 10% requirement, but it would fail the 15% requirement coming in January, meaning the lender would find the project ineligible for a Fannie Mae loan sale until an adjustment is made.
What Income Can Be Excluded From Fannie Mae’s Reserve Calculation?
This is where things become useful for associations that sit just below the threshold. Lenders are permitted to exclude certain income sources from the total assessment income used in the calculation, including:
- Assessments or fees paid to a master association
- Special assessment income
- Income allocated to the reserve account itself
- Fees paid by unit owners for things like cable or other utility services (non-incidental pass-through income)
Back out the incidental income (laundry, cable) from the earlier example, and the same $150,000 reserve contribution now clears 15% against a smaller income base and qualifies the project for a Fannie Mae loan in January.
A few things to keep in mind:
- Lenders typically won’t bother applying exclusions if the association already clears the threshold using the straightforward calculation. Exclusions come into play specifically when a project is close to the line.
- Commercial rental income (like guest suites) often falls under “incidental income” and may be excludable too, but it depends on how involved the association is in operating that amenity. Once that kind of income crosses a certain threshold, it becomes “non-incidental” and can raise separate eligibility questions. Fannie Mae’s Selling Guide section B4-2.1-03 covers related ineligible characteristics.
- If an association still doesn’t meet the requirement after exclusions, that’s when the lender turns to a reserve study for a deeper look.
When a Reserve Study Comes into Play
If the budget test alone doesn’t get an association across the threshold, lenders will request a reserve study. But not just any reserve study will do — Fannie Mae has specific requirements:
- The reserve study can be no more than three years old
- An independent third party with specific reserve study expertise must prepare the study. A study completed by a board member or generated through self-service software doesn’t qualify.
- The association must be funding reserves at a level that provides financial protection “at least equivalent” to Fannie Mae’s standards.
- A lender cannot use a baseline-funded reserve study to grant an exception to the reserve funding requirement
Do State Reserve Laws Override Fannie Mae’s Lending Requirements?
Several states, including Florida, Maryland, and New Jersey, have their own legislation around reserve studies, and some explicitly permit baseline funding. So how does that square with Fannie Mae’s rules?
The short answer: these are two separate systems that don’t conflict, but don’t excuse each other either.
- Associations still need to follow state law for things like how often a reserve study must be conducted and what funding methodology is used.
- State law allowing baseline funding doesn’t mean a lender will accept baseline funding for Fannie Mae loan eligibility purposes, as Fannie Mae’s standards can be more restrictive than state law.
- The gap only matters when an association is relying on the reserve study itself to justify an exception. In that case, Fannie Mae’s requirements govern, even if state law would allow a less conservative approach.
Why This Matters Now
Many communities are already deep into planning their 2027 budgets. Getting ahead of the 15% threshold (and understanding which income sources can and can’t be excluded from the calculation) gives boards real runway to adjust reserve contributions before the new rule takes effect, rather than scrambling to explain a shortfall to a lender later.
As always, the best move is to work closely with your reserve study provider. A well-funded reserve isn’t just about passing a lending eligibility test. It’s about making sure the money is there when the roof, elevator, or parking structure needs it.
Frequently Asked Questions About Lending Requirements
Can a Reserve Study Replace the 15% Budget Requirement?
No – not if the budget already meets 15%.
If the budget shows the association plans to reserve 15% or more of the annual budgeted assessment income, it is not required to fund reserves at the study’s recommended level to maintain mortgage eligibility with Fannie Mae. The reserve study comes into play only when the association budgets less than the required amount; in that case, the study can show the project has sufficient reserves at that lower level.
Can the Association Use a Special Assessment or a Loan/Line of Credit Instead of Budgeting 15%?
No – the 15% still has to be budgeted.
The review will assess whether the association contributes at least 15% of total operating income to reserves annually. The reserve balance, percent funded, or the existence of loans, LOCs, or special assessments do not remove the annual budget requirement.
Should an Association Still Obtain a Reserve Study If It Already Meets the 15% Requirement?
Yes – it’s a best practice, even if not required.
While Fannie Mae does not require a reserve study to show that budgeted reserves are sufficient, a reserve study is a useful planning tool that gives owners transparency into the physical condition and financial needs of their project. It is best practice for associations to obtain a quality reserve study and follow the analyst’s funding and maintenance recommendations to mitigate risks related to critical repairs and financial deficiencies that may result in large special assessments.