Condo Loans

We've been lending on Hilton Head Island's condominium projects for over 15 years. Over that time we've financed thousands of loans and reviewed hundreds of condo documents. In general, condominiums on Hilton Head Island conform to Fannie Mae and Freddie Mac's lending guidelines, but occasionally we find something out of line. Here are the 5 most common condo loan issues we've seen.

Timeshare / Condotel

Fannie Mae and Freddie Mac will not providing financing on condominium "[p]rojects that are managed and operated as a hotel or motel, even though the units are individually owned," (a.k.a. condotels) or projects that contain "[t]imeshare, fractional, or segmented ownership...," (a.k.a. timeshares). The condo questionnaire asks this question directly of the HOA/Regime Manager so asking this information upfront can help avoid any surprises when the condo questionnaire is received.

It's important to note that the condo questionnaire is specific to each regime. Therefore, if there are two separate regimes (I and II, for example) and Regime I has timeshares or condotel features while Regime II does not, it may be possible that Regime II is eligible for a Fannie Mae or Freddie Mac loan even though Regime I is ineligible. Research into how the regimes are structured may bring to light some potential solutions for financing.

Delinquency Percentage

Fannie Mae and Freddie Mac require that "[n]o more than 15% of the total units in a project may be 60 days or more past due on common expense assessments (also known as HOA fees)." Essentially, they only want to provide financing on projects where the other unit owners are paying dues to insure items like insurance and property maintenance aren't likely to be neglected. This is another item that is asked of the HOA/Regime Manger on the condo questionnaire so asking upfront can avoid surprises.

It should be noted that this issue is becoming less and less frequent, particularly in large condominium projects, the further away we get from the "great recession".


Fannie Mae and Freddie Mac will not providing financing on condominium "[p]rojects in which the HOA or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project."

Not every lawsuit creates an issue for financing, but if there is a lawsuit that originated out of a deficiency of the safety, structural soundness, or secure nature of the condominium complex then there may be an issue. One common exception occurs when the regime has identified and repaired any issue with the property, but is suing a contractor for reimbursement from loss due to defective workmanship. If property is repaired and the HOA is not at risk of any further financial loss then this scenario has been deemed acceptable in the past.

Budget Reserves

Fannie Mae and Freddie Mac require condominium projects to set aside funds in a reserve account. They stipulate that the annual budget must "provide for the funding of replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the budget."

Reserve contributions are typically included in the monthly regime dues, however, a one-time collection each year for may also be acceptable as long as the total amount collected is at least 10% of the annual budget. Additionally, if 10% of the annual budget is not set aside for reserves the association can conduct a Reserve Study to document that "the project has adequate funded reserves that provide financial protection for the project equivalent to Fannie Mae’s standard reserve requirements."

Investment Concentration

"For investment property transactions in established projects at least 50% of the total units in the
project must be conveyed to principal residence or second home purchasers. This requirement does not apply if the subject mortgage is for a principal residence or second home." Essentially, if a buyer is purchasing an investment property less than 50% of the units in the project must be used as investment properties.

This information is collected on the condo questionnaire so asking upfront may prevent surprises when the condo questionnaire is received. It is very important to note that this NOT APPLICABLE for primary residence or second home transactions. If a buyer is purchasing a primary residence or second home this guideline can be completely ignored.

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