Associations must comply with the Fannie Mae condo reserve requirements. Beginning in January 2027, Fannie Mae will increase its minimum reserve funding benchmark, which means condo communities will need to reevaluate their annual budgets and long-term financial plans. Failure to meet these standards can make it harder for buyers to obtain financing.
What are the Fannie Mae Condo Reserve Requirements?
Fannie Mae sets requirements that condominium associations must meet for buyers to qualify for certain conventional mortgage loans. One of those requirements concerns how much money the association sets aside for its reserve fund.
For loan applications dated on or after January 4, 2027, associations generally must contribute at least 15% of their annual assessment income to reserves for major repairs and replacements. This is an increase from the previous 10% requirement.
The goal is to help associations build stronger reserve funds, keep up with major repairs, and reduce the need for large special assessments. That said, noncompliance isn’t a violation of the law. The new 15% benchmark is simply a lending guideline that determines if a condo is eligible for certain mortgage loans.
The Importance of Condo Reserves
In a condo association, the reserve funds cover the cost of major repairs and replacements of common elements.
Typical reserve expenditures include roof replacements, elevator upgrades, plumbing and electrical infrastructure upgrades, building restoration, HVAC system replacements, and common-area renovations.
Without sufficient reserves, associations often need to impose special assessments or obtain loans once these elements cease to function. While both options provide funding, they can place a financial strain on unit owners. Furthermore, a condo association that frequently levies extra fees or borrows money is usually less attractive to potential buyers.
A strong reserve fund shows that the condo association is financially sound and prepared. This benefits both current and future owners.
Understanding the Fannie Mae Condo Reserve Update
The 15% requirement now serves as Fannie Mae’s default reserve funding benchmark for eligible condominium projects. For example, if an association earns $1,000,000 in annual revenue from dues and assessments, its minimum reserve allocation should be $150,000. This will satisfy the Fannie Mae condo reserve requirement.
Of course, boards should not assume that contributing 15% will automatically fully fund their reserves. In fact, the proper funding level will depend on the association’s needs, condition, and current fiscal health. To determine how much a condo must have in its reserves at any given time, a reserve study is necessary.
Keep in mind that the Fannie Mae guideline is not law. Failing to meet the requirement doesn’t mean that the board will automatically be subject to fines and penalties. It simply means that the condo may not qualify for Fannie Mae-backed financing.
Is There an Exception to the 15% Requirement?
Yes, there is an exception to the 15% Fannie Mae condo reserve rule. An association may still qualify even with reserve contributions below 15% if:
- It has a reserve study that was completed or updated within the previous three years, and
- It is funding reserves at the highest recommended funding level according to the study.
In other words, simply having a reserve study is not enough. The association must also follow the study’s funding recommendation. This allows the condo community to base its long-term financial needs on actual data — not just a percentage.
How This Affects Chicago Condominiums
In Chicago, condo associations typically come in the form of high-rise buildings, older communities, and mid-rise developments. Infrastructure repairs and replacements tend to be costly, even costing millions of dollars.
Given the condition of these buildings and current market trends, it stands to reason that a 15% reserve requirement makes more sense. A larger reserve contribution means that the condo board can better meet the association’s long-term needs.
In comparison, associations with inadequate reserves are more exposed to financial, legal, and structural problems. These communities more frequently levy special assessments and delay maintenance work. This can result in financing issues for buyers and lower property values over time.
Does Illinois Law Require 15% Reserve Contributions?
Condo associations in Illinois are statutorily required to fund their reserves (765 ILCS 605/9). Yet, unlike the Fannie Mae condo reserve guidelines, Illinois law does not impose a percentage requirement.
As a result, an association may be in compliance with Illinois law while still failing to qualify for Fannie Mae financing. Likewise, just because a condominium meets the 15% benchmark doesn’t mean it has 100% fully funded reserves. Board members must rely on a professional reserve study to understand the right funding level for the community.
How to Comply With the New Fannie Mae Condo Reserve Requirement
The 15% benchmark isn’t set to take effect until January 4, 2027, but condo associations should get ahead of the curve and make preparations early. Here’s what boards must do to meet the new Fannie Mae condominium reserve requirements.
1. Review the Current Budget
First, the board must take a closer look at its current budget. Determine what percentage of the association’s annual income is being contributed to reserves. Many associations will find that they are allocating way less than the upcoming 15% requirement.
If reserve contributions fall below the new standard, the board should estimate how much additional funding will be needed. From there, it must begin incorporating those increases into future budgets.
2. Schedule or Update a Reserve Study
Per Fannie Mae guidelines, a current reserve study may serve as an alternative to the 15% funding benchmark. To qualify, the association must generally:
- Complete or update its reserve study within the previous three years, and
- Fund reserves at the study’s highest recommended funding level.
Boards without a recent reserve study should consider obtaining one before the new requirements take effect.
3. Increase Reserve Contributions Gradually
Instead of making a large adjustment to the budget in the second half of the year, boards should try to apply the reserve increases in phases. Gradual increases can make it easier for owners to cope with higher dues. At the same time, it will allow the association to build stronger reserves and meet the new requirement on time.
4. Evaluate Upcoming Capital Projects
Boards should review anticipated repair and replacement projects over the next several years. If they expect significant expenses, the reserve funding plan should accurately reflect those expenses. Delaying reserve contributions can only result in special assessments, HOA loans, or other financing issues.
5. Explain the Changes to Homeowners
Some homeowners may question why reserve contributions or dues are increasing. To minimize pushback, board members should educate owners in advance. Let them know about Fannie Mae’s updated financing requirements and the importance of meeting them. This will help owners understand the board’s decisions.
6. Work With Financial and Management Professionals
Condo boards should never shy away from professional assistance. A condo management company, reserve specialist, accountant, or engineer can help evaluate current reserve levels, perform studies, and create a solid plan that meets the association’s needs and Fannie Mae’s eligibility standards.
Not Just an Arbitrary Requirement
The new Fannie Mae condo reserve requirement has jumped from 10% to 15%, taking effect on January 4, 2027. While this will change how some communities plan their reserves, it will ultimately benefit them in the long run. Boards should strive to comply with the guidelines or schedule their own reserve study to ensure financial stability.
First Community Management offers expert financial management services to condos and HOAs in Chicago and beyond. Get in touch with us today!
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