The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, both referred to here as “FNMA,” are federally backed companies that guarantee a majority of the mortgages made in the U.S. It has recently promulgated new guidelines for lenders making apartment purchase loans that FNMA will insure. These new guidelines may have a substantial impact upon boards, management and individual sellers and purchasers of apartments.

Historically, FNMA guidelines have had limited impact in New York City, especially Manhattan, because FNMA-insured loans are limited to (at present) approximately $1.2 million and because many purchases in more upscale Manhattan buildings have been “all cash.” The new guidelines will likely have a broader influence. Apartments in buildings that do not comply with the regulations will be ineligible for financing. Accordingly, there is much for boards and management companies to learn about changes that may be required to budgets and budgeting.

The new guidelines of most concern deal with three subjects.

First, the guidelines impose broader requirements for reserve studies – engineer investigations and reports on the condition of a building and repairs needed to keep it “healthy and safe” – and reserve amounts, up to 15% of the annual budget, that must be set aside by the building to fund reserves with which to make repairs. Funding through special assessments is limited. You should also confer with your building accountant as to the tax treatment of funds set aside each year in reserves for buildings and apartments.

Second, the underwriting requirements are being stiffened. Whereas loans for individual apartments in many buildings previously required only a “limited review” of the building’s financial, legal and insurance condition, going forward there will be no individual loan “limited review.” Unless the building has been pre-approved, the lender will be required to look at the detailed building budget, reserve study compliance and insurance in addition to the review of board minutes, legal proceedings, lease and bylaws. This will impose burdens on management companies and likely increase the bank application and management company costs to purchase applicants and borrowers. Buildings can be pre-approved for a limited period, based on demonstration of compliance with the reserve funding and insurance regulations, exempting individual apartment loans from a full review.

Third, the guidelines require building insurance policies to provide full replacement value coverage (with an exception for roofs) and limit deductibles to 5% of the per occurrence coverage. Individual apartment owner policies are allowed deductibles of no more than the greater of $2,500 or 5% of the coverage amount.

There are numerous details yet to flesh out, including whether specific guidelines apply to cooperatives as well as condominiums, and the requirements differ for small (10 units or less) and large buildings and for new and established buildings. In addition, the lenders most active in the apartment lending market may, though they are not required to, apply the newly issued FNMA guidelines to all loans in all buildings as a matter of business practice. The regulations become effective at varying dates between July 2026 and January 1, 2027. We will provide further updates as new information becomes available. Please contact us with any questions you may have.