Fannie Mae Guidelines: New and Newly Converted Condo Project Requirements

What Makes a Condo Project "New" or "Newly Converted"

You're looking at a new condo project if the building was recently constructed and units are being sold for the first time. A newly converted project means an existing building — like an apartment complex or office building — was converted into condominiums.

These projects face stricter requirements because they lack the track record of established developments. Fannie Mae wants to ensure the project is financially stable and properly managed before approving loans.

Say you're buying a unit in a converted warehouse that's now luxury condos. Even though the building itself is old, it's considered "newly converted" because the condo structure is new. Your lender will need to verify the project meets all the additional requirements outlined in this guideline.

The "Substantially Complete" Requirement

The project must be "substantially complete" unless Fannie Mae has approved other arrangements through their PERS review process. This means the building structure, common areas, and essential systems must be finished and functional.

Substantially complete also requires at least 50% of the total units in the project to be either conveyed (sold and closed) or under contract for sale to principal residence or second home purchasers. Investment buyers don't count toward this 50% threshold.

Here's an example: A 100-unit new condo building needs at least 50 units sold or under contract to owner-occupants or second home buyers. If only 30 units are sold to homeowners and 40 to investors, the project fails this test even though 70 total units are sold.

Immediate Occupancy and Legal Phase Rules

Your specific unit must be available for immediate occupancy at loan closing. You can't close on a unit that's still under construction or missing essential features like working plumbing or electrical systems.

Projects can be divided into legal phases, but there's a strict rule: no more than one legal phase per building. If a developer wants to sell units in phases, each phase must be in a separate building.

Master Association Requirements

If your condo project is part of a larger development with a master association, and unit owners pay more than $50 monthly to that master association, your lender must review the overall development plan. This applies to situations like a condo building within a larger planned community.

The lender needs to evaluate whether the master association is financially stable and properly managed. They'll review the development plan to ensure the broader community won't create problems for individual unit owners.

Completion Assurance for Unfinished Projects

For projects that are substantially complete but not 100% finished, the developer must provide completion assurance arrangements. These guarantee that all project facilities, common elements, and limited common elements will be completed.

Acceptable completion assurance includes performance bonds, completion bonds, or escrow accounts with sufficient funds. The developer must also provide assurances against construction and structural defects.

These assurances must run for at least one year after completion and cover both the unit owner and the mortgagee. This protects you if the developer fails to finish promised amenities or if construction defects emerge.

Required Legal Document Protections

The condo project's legal documents must include specific protections for mortgage lenders. Any right of first refusal in the documents cannot interfere with a mortgagee's ability to foreclose, accept a deed in lieu of foreclosure, or sell the property after foreclosure.

The documents must give mortgagees timely written notice of any action that requires unit owner approval, any default in payment of assessments that continues for 60 days, and any lapse in required insurance coverage.

No provision in the condo documents can give unit owners or other parties priority over the first mortgagee's rights to insurance proceeds or condemnation awards. Your lender's interest comes first.

Amendment Restrictions

The condo project documents must include specific language about amendments. Any amendment that materially affects the rights of unit owners or mortgagees requires approval from mortgagees holding at least 51% of the votes of units subject to mortgages.

This prevents the condo association from making major changes — like dramatically increasing assessments or changing use restrictions — without input from the lenders who have a financial stake in the project.

Florida's Special Requirements

All new and newly converted condo projects in Florida must be reviewed by Fannie Mae through the PERS process. Florida's unique condo laws and market conditions require this additional oversight.

This means if you're buying in a new Florida condo project, your lender cannot complete the review themselves. They must submit the project to Fannie Mae for evaluation, which can add time to your loan approval process.

Documents Your Lender Will Need

Your lender will require the complete condo project legal documents, including the declaration, bylaws, and any amendments. They'll need current financial statements for the homeowners association and the master association if applicable.

For projects that aren't 100% complete, the lender needs documentation of completion assurance arrangements like performance bonds or escrow agreements. They'll also need evidence that the required percentage of units are sold or under contract to owner-occupants.

The lender will verify that individual units are available for immediate occupancy through inspection or certification from the developer.

Common Problems That Derail Approval

Projects often fail the 50% owner-occupant requirement. If too many units are sold to investors rather than people who will live there or use them as second homes, the project won't qualify.

Legal document problems are another common issue. Many older conversion projects have documents that don't include the required mortgagee protections. The developer may need to amend the documents before any loans can be approved.

Incomplete projects without proper completion assurance arrangements will be rejected. The developer must have concrete financial backing to guarantee completion, not just promises.

Projects with excessive master association fees or poorly managed master associations can also face rejection. If the broader development has financial problems, it affects the individual condo project's eligibility.

References

For the official guidelines, see B4-2.2-03: Full Review: Additional Eligibility Requirements for Units in New and Newly Converted Condo Projects in the Fannie Mae Selling Guide.