Why Fannie Mae Restricts Certain Cooperative Projects
When you apply for a mortgage on a cooperative unit, your lender needs to sell that loan to Fannie Mae to free up capital for more lending. But Fannie Mae won't buy loans secured by units in cooperatives that pose financial or operational risks.
These restrictions protect both Fannie Mae and future homeowners from projects that might fail financially or lose value due to structural problems. Unlike condominiums where you own your individual unit, in a cooperative you own shares in a corporation that owns the entire building. This means the financial health and legal structure of the entire project directly affects your investment.
The guidelines in [[5705.3]] create a comprehensive list of cooperative project types that Fannie Mae considers too risky to finance.
Ownership Structure Requirements
The cooperative corporation must own both the land and all buildings in fee simple. This means complete ownership without any ground leases or other encumbrances that could threaten the project's stability.
Say you're looking at a cooperative where the corporation leases the land from a separate entity. Even if the lease runs for 99 years, Fannie Mae considers this arrangement too risky. The corporation could lose its lease, leaving shareholders without any real property rights.
The corporation also cannot be structured as a tenancy-in-common arrangement where multiple parties own undivided interests in the property. This type of ownership creates legal complications that Fannie Mae wants to avoid.
Commercial Space Limitations
Cooperative projects cannot have more than 35% of their total square footage dedicated to commercial or non-residential use. This calculation includes both above-ground and below-ground space in the entire building.
Your lender will need to verify this percentage during the project review process. They'll examine the cooperative's offering documents, financial statements, and sometimes order an appraisal that specifically addresses the commercial space calculation.
The 35% limit includes retail stores, restaurants, rental apartments, and even residential space owned by entities outside the cooperative corporation. However, it excludes amenities owned by the cooperative for shareholders' exclusive use, like fitness centers or community rooms.
If you're looking at a mixed-use building with ground-floor retail, make sure your lender confirms the commercial percentage before you get too far into the process.
Hotel-Like Operations Are Prohibited
Fannie Mae will not finance units in cooperatives that operate like hotels or provide transient housing. This includes projects with daily rental arrangements, mandatory rental pooling, or hotel-style services.
The key warning signs include registration desks, daily cleaning services, room service, central telephone systems, or restrictions on how you can decorate your unit. Projects that were converted from hotels are also generally ineligible unless they underwent complete gut rehabilitation.
Even if shareholders in resort locations rent their units short-term, this alone doesn't disqualify the project. Your lender must analyze all the project's characteristics to determine if it truly operates as a hotel.
Marketing materials, websites, and rental agreements can provide evidence of hotel-like operations. If the project advertises daily or weekly rentals prominently, or if rental income is pooled and shared among all shareholders, these are red flags.
Single Investor Concentration Limits
No single entity can own too many units in the cooperative project. The limits depend on project size: one unit maximum in projects with 2-4 units, two units maximum in projects with 5-20 units, and no more than 20% in larger projects.
This rule prevents developers from retaining control over the project or creating situations where one investor's financial problems could destabilize the entire cooperative. Your lender will review the cooperative's shareholder list to verify compliance.
Certain exceptions exist for affordable housing units, workforce housing, and units being actively marketed by developers. However, even with these exceptions, no single entity can own more than 49% of any project.
If you're buying in a newer development where the sponsor still owns many units, make sure they're actively marketing those units for sale and staying current on all maintenance fees.
Litigation and Financial Distress
Cooperatives involved in significant litigation or financial distress are ineligible for Fannie Mae financing. This includes lawsuits affecting the project's safety, structural soundness, or habitability.
Minor disputes like neighbor disagreements or small monetary claims under 10% of the project's reserves may be acceptable if properly documented. Your lender will need attorney letters explaining the litigation and confirming insurance coverage.
Projects in bankruptcy, receivership, or dissolution proceedings are automatically ineligible. The same applies to cooperatives that have voted to terminate or convert to condominiums.
Critical Repairs and Safety Issues
Projects needing critical repairs that affect safety, structural integrity, or habitability cannot receive Fannie Mae financing. This includes buildings with evacuation orders or deferred maintenance that poses safety risks.
Your lender will review recent inspection reports, reserve studies, and board meeting minutes to identify any critical repair needs. Special assessments for major structural work or safety improvements are red flags that require careful analysis.
Routine maintenance and repairs isolated to individual units don't trigger this restriction. The concern is building-wide issues that could affect the entire project's viability.
Required Documentation for Project Review
Your lender will need extensive documentation to verify project eligibility. This includes the cooperative's bylaws, financial statements, budgets, offering documents, and recent board meeting minutes.
Insurance policies, reserve studies, and any engineering or inspection reports completed within the past three years are also required. If the project has special assessments, your lender needs details about their purpose, amount, and payment schedule.
Marketing materials and rental agreements help verify that the project doesn't operate like a hotel. Shareholder lists confirm compliance with single investor concentration limits.
The project review process typically takes 2-4 weeks, so factor this timing into your purchase contract deadlines.
Common Complications
Projects in resort areas often face scrutiny for hotel-like operations, even when they're legitimate residential cooperatives. Short-term rental activity by individual shareholders can trigger additional review requirements.
Mixed-use buildings frequently bump up against the 35% commercial space limit. Your lender may need a detailed square footage analysis to confirm eligibility.
Newer developments where sponsors retain many unsold units can violate single investor concentration rules. Make sure the developer has a clear plan and timeline for selling remaining units.
Older buildings sometimes have deferred maintenance issues that could qualify as critical repairs. Recent inspection reports become crucial for determining project eligibility.
References
For the official guidelines, see 5705.3: Ineligible Cooperative Projects in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Ownership of Cooperative Project land and Cooperative Units
Cooperative hotel
Cooperative Project with multi-dwelling units
Cooperative Project with excessive commercial or non-residential space
Tenancy-in-Common Cooperative Project
Timeshare Cooperative Project with segmented ownership
Houseboat Cooperative Project
Ownership and use of Common Elements in Cooperative Project
Cooperative Project in litigation
Cooperative Project with excessive single-investor concentration
Continuing Care Retirement Community (CCRC)
Cooperative Projects composed of Manufactured Homes
Cooperative Project with mandatory dues or similar membership fees for use of Amenities such as clubhouses or recreational facilities
Leasing Cooperative
Sponsor/developer interest in Cooperative Project
Project with an evacuation order
Cooperative Projects terminating or involved in insolvency proceedings
Except for Freddie Mac-owned “no cash-out” refinance Cooperative Share Loans delivered in accordance with the requirements in
Section 5705.7
relating to Exempt from Review, Cooperative Share Loans in any of the following types of Cooperative Projects are ineligible for sale to Freddie Mac:
(a)
Ownership of Cooperative Project land and Cooperative Units
Any Cooperative Corporation that does not own:
The land on which the Cooperative Project is located in fee simple; and
The Cooperative Units in the Cooperative Project
(b)
Cooperative hotel
Any project that is a cooperative hotel or similar type of transient housing.
Projects that have one or more of the following characteristics are considered a cooperative hotel, or similar type of transient housing, and are ineligible projects:
Projects that include hotel type services and characteristics, such as registration services, rentals of Cooperative Units on a daily basis and restrictions on interior decorating
Cooperative Projects that are conversions of a hotel (or a conversion of a similar type of transient housing) unless the Cooperative Project was a Gut Rehabilitation and the resulting Cooperative Units no longer have the characteristics of a hotel or similar type of transient housing
Projects with mandatory or voluntary rental-pooling and revenue-sharing agreements (or similar agreements that restrict the Shareholder’s ability to occupy the Cooperative Unit such as blackout dates and occupancy limits) to assure an inventory of Cooperative Units for rent on a frequent basis, such as daily, weekly, monthly or seasonally
Cooperative Projects that are licensed as a hotel, motel or similar type of transient housing
The following are examples of personalized services and centralized systems that are common red flags of a Condominium Hotel or similar type of transient housing:
Central key systems
If Shareholders of Cooperative Corporations in Cooperative Projects in resort locations rent their units (either individually or through a rental management company) on a short-term basis, the project has personalized services and/or the project has centralized systems, this alone does not indicate that the project is to be considered a cooperative hotel. Sellers must fully analyze all the characteristics of the project and related information to determine if the project is a cooperative hotel. Related informational resources may include, but are not limited to, Cooperative Project Documents (e.g., by-laws, project budgets and financial statements), offering statements (or their equivalent) and marketing materials, websites, contracts for sale and appraisal reports.
(c)
Cooperative Project with multi-dwelling units
A Cooperative Project that permits a Cooperative Interest in more than one dwelling unit, with ownership of all owned Cooperative Units or Cooperative Shares financed by a single Cooperative Share Loan.
(d)
Cooperative Project with excessive commercial or non-residential space
A Cooperative Project in which more than 35% of its total above and below grade square footage (or more than 35% of the total above and below grade square footage of the building in which the Cooperative Project is located) is used as commercial or non-residential space.
In calculating the amount of commercial or non-residential space, Sellers must determine:
The total square footage of the project (or the building in which the project is located)
The square footage of the commercial or non-residential space; and
The residential space square footage
The Seller will then divide the total commercial or non-residential square footage by the total square footage of the project or building to determine the total amount of commercial or non-residential space. Below is a table illustrating what must be included or may be excluded from the calculation of commercial or non-residential space.
Excessive commercial or non-residential space
Type of commercial or non-residential space
Include in the calculation?
Retail and other commercial or non-residential space (for example, restaurants and stores)
Yes
Residential rental apartments, hotels, motels and other similar types of space, although such space may have residential characteristics
Yes
Non-residential space that the Cooperative Corporation does not own but that is owned by a private individual or entity outside of the Cooperative Corporation (for example, private fitness facilities that are membership-based rather than owned by the Cooperative Corporation for the sole use of the Shareholders)
Yes
The total square footage of commercial or non-residential space even when the Cooperative Corporation representing the Shareholders is different from the association representing the commercial owners
No
Project Amenities and facilities that are residential in nature, owned by the Cooperative Corporation and allocated for the sole use of the Shareholders
(e)
Tenancy-in-Common Cooperative Project
A Cooperative Project owned by several owners as tenants-in-common. Individuals have an undivided interest in the Cooperative Project (including the Cooperative Units) and land on which the Cooperative Project is located and may or may not have the right of exclusive occupancy of a specific Cooperative Unit.
(f)
Timeshare Cooperative Project with segmented ownership
A Cooperative Project in which there is an arrangement under which a Shareholder receives an interest in real estate and the right to use a Cooperative Unit, Amenities or both for a specified period and on a recurring basis (such as the 15th week of the year) or ownership that is for a limited period (such as for the subsequent five years).
(g)
Houseboat Cooperative Project
A Cooperative Project composed of boats that have been designed or modified to be used primarily as dwelling units.
(h)
Ownership and use of Common Elements in Cooperative Project
Except as stated below, a Cooperative Corporation must be the sole owner of and the Shareholders must have the sole right to the use of the Common Elements, including all buildings, roads, parking, facilities and Amenities. The sponsor/developer must not retain any ownership interest in the Common Elements, facilities and Amenities, except as a Holder of Unsold Shares.
A Cooperative Project that shares Amenities with one or more other residential projects is eligible if the projects share the Amenities (e.g., recreational or fitness facilities, swimming pools and clubhouses) for the sole use of the Shareholders and unit owners, if applicable. The term “residential projects” includes only residential Condominium Projects, Cooperative Projects and Planned Unit Developments (PUDs). The residential projects must have an agreement specifying:
A description of the shared Amenities and the terms of Shareholders’ and unit owners’ permitted use of the shared Amenities
How the shared Amenities will be funded, managed and maintained; and
The method for resolving disputes between the projects regarding the shared Amenities
The Common Elements, including Amenities such as parking and recreational facilities, must not be subject to a lease between the Cooperative Corporation (as lessee) and the sponsor/developer or any affiliate of the sponsor/developer (as lessor).
Parking provided under commercial leases or permit arrangements with parties unrelated to the developer are acceptable.
(i)
Cooperative Project in litigation
A Cooperative Project in which: (i) the Cooperative Corporation is named as a party to pending litigation or the Seller discovers that the Cooperative Corporation is a party to an Alternative Dispute Resolution (ADR) proceeding, such as arbitration or mediation, or (ii) the project sponsor or developer is named as a party to pending litigation or the Seller discovers that the project sponsor or developer is a party in an ADR proceeding and, in either case, the dispute relates to the safety, structural soundness, functional use or habitability of the Cooperative Project.
If the Seller determines that the pending litigation or ADR proceeding involves only minor matters that do not affect the safety, structural soundness, functional use or habitability of the Cooperative Project, the Cooperative Project is eligible if the litigation or ADR proceeding is limited to one of the following:
The litigation amount is known, the insurance company has committed to provide the defense and the litigation amount is covered by the insurance policy;
The litigation amount is unknown, the Seller has documented the Mortgage file with a copy of the complaint, or the most recent amended complaint, and with an attorney letter that supports the Seller’s determination that the litigation involves minor matters. The attorney letter must state all of the following:
The reason for the litigation;
That the insurance company has committed to provide the defense; and
That any potential monetary judgment against the Cooperative Corporation or settlement with the Cooperative Corporation, including punitive damages, will likely be covered by the Cooperative Corporation’s insurance policy.
If the attorney letter indicates that the matter will not likely be fully covered by the Cooperative Corporation’s insurance policy, then the Cooperative Project is ineligible.
The matter involves any of the following:
A non-monetary neighbor dispute or right of quiet enjoyment, whether litigated or in an ADR proceeding;
A dispute in which the Cooperative Corporation is the plaintiff in a foreclosure action;
A dispute in which the Cooperative Corporation is the plaintiff in the litigation or a party to an ADR proceeding and is seeking reimbursement for expenditures made to repair the Cooperative Project’s component(s). The expenditures may have included items that related to the safety, structural soundness, functional use or habitability of the project, provided that the repair permanently resolved the defect or issue, and the expenditures did not significantly impact the financial stability or future solvency of the Cooperative Corporation.
The estimated or known amount in the dispute in the litigation or ADR proceeding is known and is not covered by the insurance policy but is not expected to exceed 10% of the Cooperative Project’s funded reserves, provided that use of the project’s funded reserves to pay for project litigation or dispute resolution does not violate the applicable jurisdiction’s laws and regulations.
The Seller must retain documentation to support its analysis that the reason for the dispute meets Freddie Mac’s requirements for minor matters as described above.
(j)
Cooperative Project with excessive single-investor concentration
Any Cooperative Project in which a single entity owns Cooperative Shares that represent more than the following:
Number of units in the project
Total number of units owned by individual or single entity
21 or more
20%
The following may be excluded from the single investor concentration calculation:
Vacant Cooperative Units being actively marketed by the sponsor/developer (or Holder of Unsold Shares). Any units leased by the sponsor/developer must be included in the calculation of the developer’s percentage of ownership.
Cooperative Units that a non-profit entity controls or owns for the purpose of providing affordable housing
Cooperative Units held in affordable housing programs (including units subject to non-eviction rent regulation codes), and
Cooperative Units retained for workforce housing by higher-education institutions
Exceptions:
For purchase transactions, a project with single investor concentration greater than specified above will be eligible provided:
The purchase transaction will result in a reduction of the single investor concentration
The single investor must not own more than 49% of the units in the project
The Seller obtains evidence that the single investor is marketing units for sale with the goal to decrease the single investor concentration to 20% or less of the units in the project
The single investor is current on all Maintenance Fees and assessments; and
There are no planned or current special assessments in the project
When a sponsor/developer (or Holder of Unsold Shares) has been prevented from selling Cooperative Interests due to the need to comply with rent control or tenant-protection laws, the 20% single entity ownership limitation may be increased to 49% if all of the following requirements are met:
The Cooperative Interests owned by the sponsor/developer in excess of 20% must be subject to rent control or tenant-protection laws
The Seller must retain documentation, such as a regulation agreement, evidencing that the Cooperative Units retained by the sponsor/developer (or Holder of Unsold Shares) are subject to rent control or tenant-protection laws; and
The Seller meets one of the following:
Seller must document that the rental income from the tenant-protected and/or leased Cooperative Units owned by the sponsor/developer is sufficient to cover the Pro Rata Share of the Cooperative Project’s financial obligations that are applicable to the tenant-protected, leased, and vacant Cooperative Units; or
If the rental income from the tenant-protected and/or leased Cooperative Units owned by the sponsor/developer is not sufficient to cover the Pro Rata Share of the Cooperative Project’s financial obligations that are applicable to the tenant protected, leased, and vacant units, the sponsor/developer (or Holder of Unsold Shares) must have demonstrated the ability and willingness to meet any shortfall in the payment of the Pro Rata Share of the Cooperative Project’s financial obligations that are applicable to these units. In such cases, the sponsor/developer (or Holder of Unsold Shares) must:
Be current on all financial obligations for the subject Cooperative Project and on all financial obligations relating to any other project in which they own or hold more than 10% of the Cooperative Shares
Have sufficient funds to meet any shortfall in the payment of the Pro Rata Share of the Cooperative Project’s financial obligations that are applicable to the tenant-protected, leased and vacant Cooperative Units; and
Provide financial statements of the Cooperative Corporation that indicate financial stability for the Cooperative Project with no negative impact to the Cooperative Project due to sponsor/developer (or Holder of Unsold Shares) ownership
(k)
Continuing Care Retirement Community (CCRC)
A CCRC is a residential Cooperative Project specifically designed to meet the evolving health and housing needs of seniors. Unlike age-restricted communities, residents in CCRCs sign a contract in advance for a lifetime commitment of care from the facility, regardless of future health or housing needs. CCRCs may also be known as Life-Care Facilities.
(l)
Cooperative Projects composed of Manufactured Homes
A Cooperative Project composed of one or more Manufactured Homes.
(m)
Cooperative Project with mandatory dues or similar membership fees for use of Amenities such as clubhouses or recreational facilities
A Cooperative Project with mandatory dues or similar membership fees, including initiation or joining fees, that allows for the use of Amenities, such as clubhouses or recreational facilities, unless both of the following are met:
The Cooperative Corporation solely owns the Amenities; and
Only Shareholders are members, with full rights and privileges to the use of these Amenities being the primary benefit of membership
(n)
Limited equity Cooperative Project
A Cooperative Project that limits gain from appreciation upon resale of the Cooperative Shares associated with the Cooperative Unit, except as permitted for Cooperative Share Loans subject to stock transfer fees under
Section 5705.5(f)
. Cooperative Projects located on land owned by Community Land Trusts are also ineligible Cooperative Projects.
(o)
Leasing Cooperative
A Cooperative Project that involves the leasing of both the land and the improvements to the Cooperative Project including the Common Elements, even if the Cooperative Corporation owns part of the building.
(p)
Sponsor/developer interest in Cooperative Project
The sponsor/developer (or any Holder of Unsold Shares) cannot retain any ownership interest in the Cooperative Project except for its interest in any unsold Cooperative Units.
(q)
Project in need of Critical Repairs
Cooperative Share Loans secured by Cooperative Interests in Cooperative Projects in need of Critical Repairs, as defined in the
Glossary
, are not eligible for sale to Freddie Mac.
For both current and planned (i.e., Shareholders approved but the board has not initiated collection yet) special assessments, Seller must obtain and review the following information for each special assessment to determine if the funds are for a Critical Repair:
The purpose of the special assessment,
When the special assessment was approved,
The original amount of the special assessment,
The amount remaining to be collected, and
The expected date the special assessment will be paid in full
If a structural and/or mechanical inspection has been completed within 3 years of Seller’s project review date, Seller must review that inspection report. There must not be any Critical Repairs needed, as well as no current evacuation orders or similar regulatory actions.
Projects in need of Critical Repairs remain ineligible until the required repairs and/or inspection report have been completed and documented. Sellers must review an engineer’s report or substantially similar document to determine that the repairs resolved the building’s safety, soundness, structural integrity, or habitability concerns.
If damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity, or habitability of the project, then this project eligibility requirement does not apply.
This requirement does not apply to Routine Repairs, as defined in the
Glossary
.
Sellers may need to review a combination of documents to determine a project meets our physical condition requirements. Some examples include but are not limited to:
Engineer’s reports
Structural and/or mechanical inspection reports
Reserve studies
List of necessary repairs provided by the Cooperative Corporation or management company, and/or
Other substantially similar documentation
This list is not prescriptive or exhaustive. Sellers are responsible for determining which documents they need to review to ensure compliance with this requirement.
(r)
Project with an evacuation order
A project with an evacuation order due to an unsafe condition, either for a partial or total evacuation of the project’s building(s), is ineligible until the unsafe condition has been remediated and the building(s) is safe for occupancy.
(s)
Cooperative Projects terminating or involved in insolvency proceedings
A Cooperative Corporation must not be the subject of any action that would cause the Cooperative Project to cease to exist, including termination, deconversion or dissolution of the corporation’s legal structure. In addition, a Cooperative Corporation must not be the subject of a voluntary or involuntary bankruptcy, insolvency, liquidation or receivership proceedings or any substantially similar action under State or federal law. This includes a Cooperative Corporation that has voted or is in the process of voting on any of the actions or proceedings described above.
