The Lender's Guide to HOA Documents and Condo Approvals

Why Lenders Need HOA Documents

When you're lending against a property in an HOA community, you're not just evaluating the borrower and the unit. You're evaluating the financial health of the entire association.

An HOA that can't pay its bills, maintain its insurance, or manage its reserves is a risk to your collateral. A condo association mired in litigation, running a delinquency rate north of 15%, or carrying inadequate insurance isn't a community where you want to hold a mortgage.

HOA documents are how you assess that risk. And for conventional loans, Fannie Mae and Freddie Mac have specific requirements about what you need to review and what thresholds must be met.

The Core Documents

Condo Questionnaire

This is the single most important document for lender underwriting. The condo questionnaire (Fannie Mae Form 1076 for full review, Form 1077 for limited review) provides a structured set of data points about the project.

Key items the questionnaire must address:

• •Total number of units and percentage sold
• •Owner-occupancy ratio
• •Assessment amounts and delinquency rates
• •Budget allocation and reserve funding
• •Insurance coverage details
• •Pending or anticipated litigation
• •Commercial space percentage
• •Single-entity ownership concentration

The questionnaire is filled out by the HOA's management company. It requires specific, verifiable data — not estimates or approximations.

Financial Statements

Current financial statements — ideally audited or reviewed by a CPA — tell you how the association manages its money. You're looking for:

• •Revenue vs. expenses. Is the association operating in the black?
• •Reserve contributions. What percentage of the budget goes to reserves?
• •Delinquency levels. How much in assessments is past due?
• •Special assessments. Any one-time charges approved or proposed?

For larger projects (150+ units), Fannie Mae requires an audited financial statement. For smaller projects, a management-prepared statement may suffice.

Insurance Certificate

The HOA's master insurance policy must meet minimum coverage requirements for conventional lending. You need to verify:

• •Hazard/property coverage: At least 100% replacement cost of the insurable improvements
• •General liability: Minimum $1 million per occurrence
• •Fidelity bond: At least 3 months of assessments plus reserves
• •Flood insurance: Required if any insured building is in a FEMA flood zone

The actual certificate of insurance — not a verbal confirmation or a summary — is required. Review the effective dates, coverage limits, and named insured carefully.

Reserve Study

A reserve study (or at minimum, a reserve fund summary) shows whether the association is saving enough to cover future capital expenses. Roof replacements, elevator modernization, parking lot repaving — these are expensive, and the reserves should be building toward them.

Fannie Mae doesn't mandate a specific reserve funding percentage, but underwriters use it as a key risk indicator. A project funded below 20% may get additional scrutiny or require compensating factors.

Fannie Mae Full Review Requirements

A full project review is required for most condo purchase transactions. Here's what Fannie Mae needs:

Eligibility criteria:

• •At least 50% of units must be owner-occupied or second homes (not investor-owned)
• •No more than 15% of unit owners can be 60+ days delinquent on assessments
• •No single entity can own more than 20% of units (10% for projects with fewer than 20 units)
• •Commercial space cannot exceed 35% of total project square footage (25% for two-to-four unit projects)
• •No pending litigation that would affect the safety, structural soundness, or habitability of the project
• •Adequate insurance coverage per the guidelines above
• •The project must be complete (no ongoing construction or phasing, with limited exceptions)

Required documentation:

• •Completed condo questionnaire (Form 1076)
• •Current year's budget
• •Most recent financial statement
• •Certificate of insurance
• •Master deed or declaration (if requested)

Fannie Mae Limited Review

A limited review applies to certain refinances, second homes, and investment properties. The requirements are less stringent:

• •Completed limited review questionnaire (Form 1077)
• •Fewer financial documentation requirements
• •Less scrutiny on owner-occupancy ratios

But don't assume limited review means no review. The lender still needs to verify that the project meets basic eligibility criteria, including insurance and litigation status.

PERS: The Exception Path

When a project doesn't meet standard eligibility criteria, Fannie Mae's Project Eligibility Review Service (PERS) offers a manual review path. This is common for:

• •New construction projects not yet fully sold
• •Projects with higher-than-normal commercial space
• •Projects with ongoing litigation
• •Projects with owner-occupancy ratios below 50%

PERS reviews take longer (typically 2-4 weeks) and require more documentation. They're also not guaranteed to result in approval. But for projects that fall outside standard guidelines, PERS may be the only path to a conventional loan.

FHA Requirements

FHA loans have a separate approval process for condos. The project must be on the FHA-approved list or receive a Single-Unit Approval (SUA).

FHA project approval requires:

• •Owner-occupancy rate of at least 50%
• •No more than 50% FHA-insured concentration
• •Adequate insurance
• •No more than 15% delinquency
• •At least 10% of the budget allocated to reserves

FHA maintains a searchable database of approved projects at hud.gov. If the project isn't approved, the buyer either needs to pursue SUA or switch to a conventional loan.

Common Underwriting Issues

Delinquency over 15%. This is the most frequent deal-killer. The 15% threshold applies to the number of units 60+ days past due. During economic downturns or in communities with high investor ownership, delinquency rates can spike above this level.

Insufficient insurance. Especially fidelity bond coverage, which smaller associations sometimes skip. If the bond amount is below the Fannie Mae requirement, the association needs to increase coverage before the loan can close.

Litigation. Not all litigation is disqualifying. A slip-and-fall claim is different from a construction defect lawsuit. The underwriter needs to evaluate the nature, potential cost, and insurance coverage for any pending claims.

Budget deficits. An association running a deficit — spending more than it collects — raises questions about future assessment increases or special assessments, both of which affect the borrower's ability to pay.

Timing and Workflow

For lenders, the HOA document review often sits on the critical path. Here's how to manage it:

1. 1.Order the condo questionnaire at loan application. Don't wait for the appraisal or credit decision.
2. 2.Set expectations with the loan officer. Condo questionnaires take 5-15 business days. Factor this into your rate lock and closing timeline.
3. 3.Review documents as they arrive. Don't wait until the full file is assembled. Flag issues early so there's time to resolve them.
4. 4.Build relationships with management companies. Repeat business creates goodwill and may get you faster turnaround.
5. 5.Have a plan for ineligible projects. If the project doesn't meet standard guidelines, know your PERS and SUA options before the borrower is counting on a closing date.

The bottom line for lenders: HOA documents aren't a formality. They're a core component of underwriting that directly affects the risk profile of the loan. Treat them with the same rigor you'd apply to any other element of the credit decision.