The Quick Read: On a condo, the lender approves the building as well as you. Two of the biggest building tests are whether the association saves enough for repairs and whether it is tied up in the wrong kind of lawsuit. A strong credit file does not fix a building that fails either test.
Key Takeaways
- “Reserve” means two different things here. One is your own cash after closing. The other is the money the association sets aside for big repairs. This article is mostly about the second.
- The reserve test looks at the association’s budget, not its bank balance. At the time of writing, the budget line is generally at least 10% of assessment income.
- A scheduled change would raise that figure to 15% for applications dated on or after January 4. Confirm the figure in effect on your application date.
- Lawsuits matter most when they touch safety, structure, habitability or functional use. Money-only disputes are treated differently.
- If the building fails, you have options: a different unit, a different loan type, or waiting for the issue to clear.
Which “Reserve” Are We Talking About?
Search for this topic and you get two answers mixed together. Here is how they split.
Conventional payment estimate
The starting figures are an example price at the first-time buyer’s minimum down payment. Replace them with yours.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a conventional loan quote.
Estimate seeded at the low end of Fannie Mae’s published range (0.58%–1.86% a year); the insurer prices the actual premium on the score and the leverage. Applies only above 80% loan-to-value.
Illustrative starting assumptions: a $350,000 price, the first-time buyer’s minimum down payment, a thirty-year term at the current Freddie Mac benchmark, mortgage insurance at the low end of Fannie Mae’s published range, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a conventional loan quote; your rate is set by the lender at lock. The mortgage insurance figure is an editable estimate seeded from Fannie Mae’s published typical range, not a premium quote; the insurer prices the actual premium, and the cancellation month assumes scheduled payments with no extra principal and no change in value. Taxes, insurance and dues are editable estimates; closing costs are not included. Conforming loan limits apply by county. Licensed in sixteen states for consumer mortgages.
| Factor | Your reserves | Project reserves |
|---|---|---|
| Who it applies to | You, the borrower | The condo association |
| What is measured | Liquid assets left after closing | Budgeted repair savings |
| Who checks | Underwriter, from your statements | Lender, from the HOA budget |
| What failure means | Needs more cash or a different file | The whole building is ineligible |
Your own cash reserves depend on the file. On a loan approved by automated underwriting, the findings drive the requirement. On a manually underwritten loan, reserves and score work together under the Eligibility Matrix. That is a borrower-level conversation.
Project reserves are a building-level test. They apply to every buyer in the building, whatever the borrower looks like. That is the focus here.
Why the Building Gets Underwritten
Most conventional loans are sold to Fannie Mae or Freddie Mac after closing. Those two agencies will not buy a loan on a unit in a project that fails their rules. So a lender who closes a loan in a failing building is stuck with it.
That is why you hear the word “warrantable.” A warrantable condo project meets the agency tests, and a non-warrantable one does not. Neither word says anything about you.
Fannie Mae’s Selling Guide says a project must be created and stay in full compliance with state law and other applicable laws. Reserves and litigation are two of the main places projects trip.
Across the wholesale programs Lendmire places files with, the borrower side of a condo purchase is usually the easy part. The envelope is familiar: 97% leverage for a first-time buyer, 95% otherwise, on a principal residence. Mortgage insurance applies above 80%, and the usual floor is a 620 score. The automated ratio ceiling is 50%. All of it is subject to lender guidelines and full file review. You can read the basics on Lendmire’s conventional loan programs page. None of those numbers help if the building fails.
One note on occupancy. A second home tops out at 90% leverage on a purchase, while a primary residence can go higher. This article assumes the home you live in. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
How the Reserve Test Works
The reserve test asks one question. Does the association’s annual budget set aside enough for future repairs? Freddie Mac’s Guide section 5701.5 lays out the formula for established projects.
1. Take the annual budgeted reserve allocation.
2. Divide it by annual budgeted assessment income, including regular common expense fees.
3. Compare the result to the minimum.
The minimum has been 10% of the budget. Fannie Mae’s Full Review uses the same 10% idea.
Not everything counts as income in the bottom half of that fraction. The calculation may leave out:
- special assessment income
- income already allocated to reserve accounts
- incidental income the association does not rely on to operate
- pass-through utility items, such as internet
The test reads the budget, not the account balance. An association can hold a large pile of cash and still miss the test if the budget line is thin. The reverse is also true.
A Worked Example
Say an association has 100 units of qualifying budgeted income after the exclusions above. These are made-up figures.
- Version A: the budget sets aside 8 of those 100 units. That is 8%, below the 10% line, and the lender looks for another path.
- Version B: the budget sets aside 12 of 100. That is 12%, which clears 10%.
Version B clears today’s test. Under the scheduled 15% rule, though, it would fall short. Unless the association uses the reserve-study exception, which is covered below, it would fail on a loan application dated on or after January 4.
The Reserve Study Escape Hatch
A current reserve study can stand in for the budget percentage. Under Freddie Mac’s guide, the study must include a component inventory, a financial analysis and a funding plan. It must be dated within 36 months of the lender’s determination.
Fannie Mae’s approach is tighter. As KSN Law’s summary of Fannie Mae’s updated condo guidance explains, lenders may not accept “baseline” funding when a study is used. The budget has to follow the study’s highest recommended funding level.
Special assessments cannot stand in for the budget line either. Per that same KSN Law summary, Fannie Mae will not let a special assessment replace the 10% allocation under a Full Review. A one-time bill to owners does not show the association plans ahead.
What Is Changing, and When
This part is time-sensitive, so read it with care.
- Application date drives everything. The loan’s application date decides which rule applies. The closing date does not.
- The 15% change. The Community Associations Institute (CAI) reports that Fannie Mae and Freddie Mac are raising the minimum reserve funding requirement from 10% to 15% of the annual budget. It applies to applications dated on or after January 4. CAI traces this to a Fannie Mae lender letter issued in March. Treat the 15% figure as an upcoming change, not a rule already in force.
- The study exception. CAI also reports that the 15% allocation is not required if the association has a study done or updated within three years and follows the highest recommended funding level. Baseline funding does not qualify.
- Freddie Mac’s page. Its published section still shows 10%. Guides get updated, so ask your loan officer which figure applies to your application date.
One practical point. If you are shopping for a unit before that January date, your application date may fall on one side of the line or the other. Ask the lender early, because a building that passes in one month may not pass in the next.
Higher reserve funding generally means higher HOA dues, because the association has to collect more to set money aside. The law firm Winstead has flagged the lender letter as likely to raise association costs. Ask what the budget looks like before you commit, since dues belong in your own monthly planning.
Litigation Rules: When a Lawsuit Blocks the Loan
Not every lawsuit kills a condo loan. The ones that do are tied to the building itself.
Under Freddie Mac’s Guide section 5701.3, a project is ineligible when it is in litigation. The trigger is one of these:
- the HOA is a named party to pending litigation, or is in alternative dispute resolution (ADR), such as arbitration or mediation
- the sponsor or developer is named or in ADR
In each case the dispute has to relate to the project’s safety, structural soundness, functional use or habitability.
Fannie Mae’s project-status feedback treats pending litigation much the same way. The HOA or the developer is a named party, and the dispute touches safety, structure, habitability or functional use. That feedback document is older, so your lender checks it against the current Selling Guide.
One difference to know. Freddie Mac names ADR proceedings outright. Do not assume the two agencies read a lawsuit in exactly the same way.
Types of Lawsuits and How They Tend to Land
This table is a general guide, not a verdict. The lender reads the actual claim.
| Type of dispute | Lender concern | Usual read |
|---|---|---|
| Construction defect | Safety and structure | Problematic |
| Structural or safety claim | Habitability | Problematic |
| Developer suit on building condition | Structure | Problematic |
| Money-only claim, such as unpaid dues | Cash drain | Often workable if documented |
| Routine liability or boundary matter | Limited | Often workable if documented |
The Carve-Outs
Situations where litigation does not automatically sink a project:
- The amount is known, the insurer has committed to defend, and the policy covers the amount.
- The amount is unknown, and the lender has documented the file with the complaint and supporting material.
- The amount in dispute is not expected to exceed 10% of the project’s funded reserves, as long as using the reserves to pay does not violate the jurisdiction’s laws.
That third carve-out is where the two topics meet. A lawsuit can pull money from the reserve account or lead to a special assessment. So reserves and litigation are often one story.
What the Lender Looks At
The lender sorts out who the parties are, what the claim is about, and whether it touches safety, structure, habitability or use. It then checks whether insurance covers the exposure. If the matter is minor, the lender documents why. The file may include an attorney letter and insurance confirmation.
If you are weighing a different loan type for the same building, Lendmire’s piece FHA Condo Requirements for Project Approval and Reserve Tests shows how a government-backed project review compares.
Other Ways a Project Fails
Reserves and lawsuits are not the only tripwires. Fannie Mae’s August condo FAQ points to several others.
- Failed inspections. A project that fails mandatory state, county or other jurisdictional inspections or certifications on structural soundness, safety and habitability is not eligible.
- Critical repairs. Freddie Mac makes a project in need of Critical Repairs, or under an evacuation order, ineligible. A special assessment that funds those repairs can leave the project ineligible until the work is done.
- CPM status. Fannie Mae tracks projects in Condo Project Manager (CPM), its project review system. A project marked “Unavailable” there cannot be sold to Fannie Mae.
- Status changes. An approved project can lose its status. A failed inspection is one example.
Lenders may use HOA minutes, financial statements and engineer’s reports to spot critical repairs and special assessments. Those sources are “neither prescriptive nor exhaustive,” meaning the lender can ask for more.
Step by Step: How the Review Runs
Here is the order things usually happen once you apply.
1. Application. The date is set, and it decides which rules apply.
2. Review path. The lender picks one. Fannie Mae’s Full Review process is the standard route. Freddie Mac has separate paths, including an exemption for some small projects under its criteria.
3. Documents. The lender gathers the HOA questionnaire, budget, balance sheet, master insurance and any reserve study. If there is litigation, it also asks for an attorney letter.
4. Reserve test. The lender runs the budget math, or reads the reserve study.
5. Litigation test. The lender identifies the parties, the claim and any insurance coverage.
6. Appraisal. The appraiser reports project information and any adverse conditions.
7. Outcome. The project is approved, or it is ineligible or “Unavailable.” Then you need another loan type or another unit.
The file decides this from several points: the reserve line or study, who the parties to a lawsuit are, what the suit is about, insurance, critical repairs and special assessments, and your application date.
The Project-Level Checklist
Ask for these early. Association paperwork often takes longest because you are waiting on a third party.
| Item | Who provides it | Why it matters |
|---|---|---|
| HOA questionnaire | Management company | Answers most eligibility questions |
| Annual budget | Association | Shows the reserve line |
| Reserve study | Association | May replace the 10% test |
| Balance sheet | Association | Shows finances and any special assessments |
| Master insurance | Association | Offsets some litigation exposure |
| Attorney letter | Association counsel | Describes any lawsuit |
A review can stop a purchase if documents are missing. Ask your agent for the budget, reserve study and litigation disclosures before you fall for the unit.
If the Building Fails
The project failing is not the same as you failing. You still have routes.
| Option | What it means | Trade-off |
|---|---|---|
| Different unit | Buy in a project that passes | Changes your search |
| Wait | Let a lawsuit settle or repairs finish | Timing is out of your control |
| Different loan type | FHA runs its own project approval | A separate test, not an automatic way around |
| Non-warrantable loan | Financing outside agency rules | Usually different pricing and down payment terms |
Lendmire’s piece FHA vs Conventional Loan for a First-Time Condo Buyer: Appraisal Rules walks through how those choices compare.
There is an honest trade-off to weigh. A non-warrantable loan can get you in the door. But a building that fails these tests may also be harder to sell later, and your own refinance choices narrow. The next buyer faces the same review. Treat that as commentary, not rule. The logic holds, though.
An eligible status can come back. A settlement, a dismissal or finished repairs can clear the issue. It still has to be documented, and the lender decides whether it counts.
Common Misreads
- “Any lawsuit kills the loan.” It does not. The trigger is tied to safety, structure, habitability or functional use, and there are documented exceptions.
- “The account balance has to be 10%.” The test is the budgeted allocation as a share of assessment income.
- “A special assessment fixes the problem.” It cannot replace the budget line under a Full Review.
- “Great credit overrides the building.” A project can fail on its own, even for a strong borrower.
- “The 15% rule already applies.” It is tied to applications dated on or after January 4.
- “Fannie and Freddie are identical.” They are aligned, but not the same. Read the wording for each.
Key Terms Defined
Warrantable condo: a condo project that meets Fannie Mae and Freddie Mac rules, so loans on its units can be sold to them.
Non-warrantable condo: a project that fails those rules. Loans there need a different path.
Replacement reserves: money an association sets aside for big repairs, such as a roof or an elevator.
Reserve study: a report that lists the building’s major parts and plans how to pay for their repair or replacement.
Special assessment: a one-time charge to owners to cover a cost the budget did not.
Alternative dispute resolution (ADR): a way to settle a dispute outside court, such as mediation or arbitration.
Condo Project Manager (CPM): Fannie Mae’s system for tracking the review status of condo projects.
Frequently Asked Questions
Can a condo lose its approval after it was approved once?
Yes. Project status is not permanent. A failed inspection, a new lawsuit or a change in the budget can move a project to ineligible or “Unavailable.” Your lender reviews the project as of your application, so an earlier approval does not carry over.
Does a lawsuit against the HOA always block a conventional loan?
No. The dispute generally has to relate to safety, structural soundness, habitability or functional use. Freddie Mac also lists carve-outs for insured claims and for amounts not expected to exceed 10% of funded reserves. The lender reads the actual claim.
Does the 10% reserve rule mean the association needs 10% in the bank?
No. The test measures the budgeted reserve allocation divided by budgeted assessment income. An association can hold a large balance and still miss the test, or hold less and pass.
Can a reserve study replace the percentage test?
Sometimes. Freddie Mac allows a study dated within 36 months of the lender’s determination that includes a component inventory, financial analysis and funding plan. Fannie Mae now requires the budget to follow the study’s highest recommended funding, not baseline.
Does my own credit score matter if the building fails?
Your score matters for your loan, but it cannot rescue an ineligible project. The building has to pass on its own. If it fails, the conversation turns to another unit, another loan type or waiting for the issue to clear.
Where to Go From Here
Before you make an offer on a condo, ask for the budget, the reserve study and any litigation disclosures. Those three documents tell you most of what the lender will find.
If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Lendmire is a mortgage broker and arranges these loans through wholesale lenders. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B4-2.1-03, Ineligible Projects
2. Freddie Mac Guide 5701.5, Reserve Requirements
3. KSN Law, Fannie Mae updated condominium project guidance
4. Community Associations Institute, Fannie Mae and Freddie Mac update
5. Winstead, What Fannie Mae’s lender letter does and why it matters for affordability
6. Freddie Mac Guide 5701.3, Ineligible Projects and Litigation
8. Fannie Mae Selling Guide B4-2.2-02, Full Review Process
This article is part of Lendmire’s conventional loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can a Repeat Buyer Get a Homeready Conventional Loan? · Conventional Loan PMI Calculation Rules for Appraised Value and Price · Is Refinancing Into a Conventional Loan Worth It?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.