Freddie Mac Single-Family Seller/Servicer Guide Section 5701.6 — New Condominium Projects

Freddie Mac Single-Family Seller/Servicer Guide Section 5701.6 — New Condominium Projects

5701.6: New Condominium Projects (05/06/26) This section contains: Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-35 ■ Project completion requirements ■ Owner-occupancy requirements for New Condominium Projects ■ Project budget requirement for New Condominium Projects ■ Delinquent assessments for New Condominium Projects ■ Compliance with laws ■ Limitations on ability to sell/right of first refusal ■ Conversions ■ Mortgagee consent ■ Rights of Condominium mortgagees and guarantors ■ First mortgagee’s rights confirmed ■ Requirements when a Seller relies on a project reserve study for New Condominium Projects ■ Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects ■ New Condominium Project sold with excessive Seller contributions To be eligible for the New Condominium Projects review type, the Condominium Project must meet the definition of a New Condominium Project. In addition to the project review and eligibility requirements in Section 5701.2, Mortgages secured by Condominium Units in New Condominium Projects must comply with all of the following requirements: (a) Project completion requirements The subject legal phase (or the subject building) and any prior legal phases in which units have been offered for sale must be substantially complete. “Substantially complete” indicates that the Common Elements are complete and the units are complete subject to the selection of buyer preference items. For the purpose of determining project completion under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-36 the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. (b) Owner-occupancy requirements for New Condominium Projects At least 50% of the total units in the project (or at least 50% of the sum of the subject legal phase and prior legal phases) must have been conveyed or must be under contract to purchasers who will occupy the units as their Primary Residences or second homes. For the purpose of calculating owner-occupancy under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. (c) Project budget requirement for New Condominium Projects The project’s budget for the current fiscal year must comply with the following: 1. The Homeowners Association’s (HOA’s) assessments must begin once the developer has ceased to pay operating expenses attributable to the Condominium Project, whether or not all units have been sold. When any unit owner other than the developer pays assessments, the developer must pay the assessments attributable to the unsold units. 2. The project’s budget (or its projected budget if the project has not been turned over to the unit owners) must be consistent with the nature of the project 3. Appropriate assessments must be established to manage the project 4. There must be appropriate allocations for line items pertinent to the type and status of the Condominium Project 5. If the project was recently converted, the developer must have initially funded a working capital fund, through contributions made by the developer and/or purchasers of the Condominium Units, in an amount consistent with the estimated remaining life of the Common Elements 6. There must be adequate funding for insurance deductible amounts 7. At least 10% of the budget must provide funding for replacement reserves for capital expenditures and deferred maintenance based on the project’s age, estimated remaining life and replacement cost of major Common Elements Calculation of replacement reserve percentage Formula Exclusions Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-37 The replacement reserve percentage is determined by dividing: (i) the annual budgeted replacement reserve allocation by (ii) the HOA’s annual budgeted assessment income (including regular common expense fees) The calculation may exclude: i. Special assessment income ii. Income allocated to or in reserve accounts iii. Incidental income not relied upon for maintenance operations or capital improvements; and iv. Amounts collected from unit owners (but usually paid individually by them) for items or utilities such as internet access 8. If the budget does not provide a replacement reserve of at least 10%, a Seller may rely on either: i. A reserve study, provided the conditions in Section 5701.6(k) below are met; or ii. Contributions to a working capital fund, provided the conditions in Section 5701.6(l) below are met. These contributions can be in addition to or in lieu of any working capital fund contributions made by the developer in the case of a recently converted project. 9. An HOA must not receive more than 10% of its budgeted income from the rental or leasing of commercial parking facilities (d) Delinquent assessments for New Condominium Projects (i) HOA assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of their HOA assessments. (ii) Special assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of each special assessment. (e) Compliance with laws The Condominium Project has been created and exists in full compliance with the applicable State law, the requirements of the jurisdiction in which the Condominium Project is located, and with all other applicable laws and regulations governing creation of the Condominium Project. Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-38 (f) Limitations on ability to sell/right of first refusal Any right of first refusal in the Project Documents will not adversely impact the rights of a mortgagee or its assignee to: ■ Foreclose or take title to a Condominium Unit pursuant to the remedies in the Mortgage ■ Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; or ■ Sell or lease a unit acquired by the mortgagee or its assignee (g) Conversions For a Condominium Project that was created by conversion of a building(s) with a prior use, the following requirements must be met for the Seller’s review and determination of project eligibility: 1. For a conversion involving a Non-Gut Rehabilitation of a prior use of the building that was legally created within the past three years, the engineer’s report (or functionally equivalent documentation for jurisdictions that do not require an engineer’s report) must state: ■ That the project is structurally sound ■ The condition and remaining useful life of the major project components are sufficient to meet the residential needs of the project; and ■ That there is no evidence that any of these conditions have not been met Note: Major components include the roof, elevators and mechanical systems such as HVAC, plumbing and electricity. 2. All rehabilitation work involved in the conversion (Non-Gut Rehabilitation and Gut Rehabilitation) must be completed in a professional manner 3. A review of the engineer’s report (or functionally equivalent documentation) is not required for conversions involving: ■ A Gut Rehabilitation, and ■ A Non-Gut Rehabilitation if more than three years have elapsed since the legal creation of the project Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-39 (h) Mortgagee consent 1. The Project Documents or applicable State law must provide that amendments of a material adverse nature to First Lien mortgagees be agreed to by mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) subject to First Lien Mortgages 2. The Project Documents or applicable State law must provide that any action to terminate the legal status of the project or to use insurance proceeds for any purpose other than to rebuild must be agreed to by First Lien mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) that are subject to First Lien Mortgages 3. The Project Documents may allow implied approval to be assumed when the then current mortgagee of record fails to submit a response to any written proposal for an amendment within 60 days after the then current mortgagee of record actually receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a “return receipt” requested (i) Rights of Condominium mortgagees and guarantors The Project Documents, applicable State law, or any applicable insurance policy must give the mortgagee and guarantor of the Mortgage on any unit in a Condominium Project the right to timely written notice of: 1. Any condemnation or casualty loss that affects either a material portion of the Condominium Project or the unit securing its Mortgage 2. Any 60-day Delinquency in the payment of assessments or charges owed by the owner of any unit for which it holds the Mortgage 3. A lapse, cancelation, or material reduction of any insurance policy maintained by the HOA 4. Any proposed action that requires the consent of a specified percentage of mortgagees (j) First mortgagee’s rights confirmed The Project Documents must not give a Condominium Unit owner or any other party priority over any rights of the first mortgagee of the Condominium Unit pursuant to its Mortgage in the case of payment to the unit owner of proceeds from termination, or insurance proceeds or condemnation awards for losses to or a taking of Condominium Units and/or Common Elements. Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-40 (k) Requirements when a Seller relies on a project reserve study for New Condominium Projects The reserve study must comply with the following requirements: 1. The reserve study generally must include: ■ An inventory of major components of the project ■ Financial analysis and evaluation of current reserve fund adequacy; and ■ Proposed annual reserve funding plan 2. A reserve study’s financial analysis must validate that the project has appropriately allocated the recommended reserve funds to provide the Condominium Project with sufficient financial protection comparable to Freddie Mac’s standard budget requirements for replacement reserves 3. The reserve study’s annual reserve funding plan, which details total costs identified for replacement components, must meet or exceed the study’s recommendation and conclusion 4. The most current reserve study (or update) must be dated within 36 months of the Seller’s determination that a Condominium Project is eligible (see Section 5701.2(a)(2)) 5. The reserve study must be prepared by an independent expert skilled in performing such studies (such as a reserve study professional, a construction engineer, a certified public accountant who specializes in reserve studies, or any professional with demonstrated experience and knowledge in completing reserve studies) 6. The reserve study must meet or exceed requirements set forth in any applicable state statutes 7. The reserve study must comment favorably on the project’s age, estimated remaining life, structural integrity and the replacement of major components If the Seller relies on a reserve study that meets the requirements of this section, the project’s budget must contain appropriate allocations to support the costs identified in the study. The Seller must obtain and retain in the Mortgage file a copy of the reserve study. The Seller must also perform an analysis of the study and retain this analysis in the Mortgage file. (l) Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-41 When a Seller relies on contributions to a working capital fund, the following requirements must be met: 1. The Project Documents must require the purchaser of a Condominium Unit to pay a non- refundable and non-transferable assessment to a working capital fund which must be established for the periodic maintenance, repair and replacement of the Common Elements 2. The assessment must be equal to a minimum of at least two months of the HOA fees attributable to the Condominium Unit and be due and payable at closing 3. The developer is in control of the HOA (m)New Condominium Project sold with excessive Seller contributions If a builder, developer or property seller offers financing or sale arrangements (such as rent- backs, payments of principal, interest, taxes and insurance) for Condominium Unit Mortgages in a New Condominium Project these contributions must comply with the interested party contribution requirements of Section 5501.6. Note: If the requirements for New Condominium Projects in this Section 5701.6 are met, then the Seller is not required to comply with the requirements for any of the other project review types in Sections 5701.4 (Streamlined review), 5701.5 (Established Condominium Project reviews), 5701.7 (Exempt from review) and 5701.9 (Reciprocal project reviews). 5701.6: New Condominium Projects (Future effective date 08/03/26) Effective for Mortgages with Application Received Dates on or after August 3, 2026. This section contains: ■ Project completion requirements ■ Owner-occupancy requirements for New Condominium Projects ■ Project budget requirement for New Condominium Projects ■ Delinquent assessments for New Condominium Projects ■ Compliance with laws ■ Limitations on ability to sell/right of first refusal Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-42 ■ Conversions ■ Mortgagee consent ■ Rights of Condominium mortgagees and guarantors ■ First mortgagee’s rights confirmed ■ Requirements when a Seller relies on a project reserve study for New Condominium Projects ■ Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects ■ New Condominium Project sold with excessive Seller contributions To be eligible for the New Condominium Projects review type, the Condominium Project must meet the definition of a New Condominium Project. In addition to the project review and eligibility requirements in Section 5701.2, Mortgages secured by Condominium Units in New Condominium Projects must comply with all of the following requirements: (a) Project completion requirements The subject legal phase (or the subject building) and any prior legal phases in which units have been offered for sale must be substantially complete. “Substantially complete” indicates that the Common Elements are complete and the units are complete subject to the selection of buyer preference items. For the purpose of determining project completion under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. (b) Owner-occupancy requirements for New Condominium Projects At least 50% of the total units in the project (or at least 50% of the sum of the subject legal phase and prior legal phases) must have been conveyed or must be under contract to purchasers who will occupy the units as their Primary Residences or second homes. For the purpose of calculating owner-occupancy under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-43 (c) Project budget requirement for New Condominium Projects The project’s budget for the current fiscal year must comply with the following: 1. The Homeowners Association’s (HOA’s) assessments must begin once the developer has ceased to pay operating expenses attributable to the Condominium Project, whether or not all units have been sold. When any unit owner other than the developer pays assessments, the developer must pay the assessments attributable to the unsold units. 2. The project’s budget (or its projected budget if the project has not been turned over to the unit owners) must be consistent with the nature of the project 3. Appropriate assessments must be established to manage the project 4. There must be appropriate allocations for line items pertinent to the type and status of the Condominium Project 5. If the project was recently converted, the developer must have initially funded a working capital fund, through contributions made by the developer and/or purchasers of the Condominium Units, in an amount consistent with the estimated remaining life of the Common Elements 6. There must be adequate funding for insurance deductible amounts 7. At least 10% of the budget must provide funding for replacement reserves for capital expenditures and deferred maintenance based on the project’s age, estimated remaining life and replacement cost of major Common Elements Calculation of replacement reserve percentage Formula Exclusions The replacement reserve percentage is determined by dividing: (i) the annual budgeted replacement reserve allocation by (ii) the HOA’s annual budgeted assessment income (including regular common expense fees) The calculation may exclude: i. Special assessment income ii. Income allocated to or in reserve accounts iii. Incidental income not relied upon for maintenance operations or capital improvements; and iv. Amounts collected from unit owners (but usually paid individually by them) for items or utilities such as internet access Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-44 8. If the budget does not provide a replacement reserve of at least 10%, a Seller may rely on either: i. A reserve study, provided the conditions in Section 5701.6(k) below are met; or ii. Contributions to a working capital fund, provided the conditions in Section 5701.6(l) below are met. These contributions can be in addition to or in lieu of any working capital fund contributions made by the developer in the case of a recently converted project. 9. An HOA must not receive more than 10% of its budgeted income from the rental or leasing of commercial parking facilities (d) Delinquent assessments for New Condominium Projects (i) HOA assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of their HOA assessments. (ii) Special assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of each special assessment. (e) Compliance with laws The Condominium Project has been created and exists in full compliance with the applicable State law, the requirements of the jurisdiction in which the Condominium Project is located, and with all other applicable laws and regulations governing creation of the Condominium Project. (f) Limitations on ability to sell/right of first refusal Any right of first refusal in the Project Documents will not adversely impact the rights of a mortgagee or its assignee to: ■ Foreclose or take title to a Condominium Unit pursuant to the remedies in the Mortgage ■ Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; or ■ Sell or lease a unit acquired by the mortgagee or its assignee Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-45 (g) Conversions For a Condominium Project that was created by conversion of a building(s) with a prior use, the following requirements must be met for the Seller’s review and determination of project eligibility: 1. For a conversion involving a Non-Gut Rehabilitation of a prior use of the building that was legally created within the past three years, the engineer’s report (or functionally equivalent documentation for jurisdictions that do not require an engineer’s report) must state: ■ That the project is structurally sound ■ The condition and remaining useful life of the major project components are sufficient to meet the residential needs of the project; and ■ That there is no evidence that any of these conditions have not been met Note: Major components include the roof, elevators and mechanical systems such as HVAC, plumbing and electricity. 2. All rehabilitation work involved in the conversion (Non-Gut Rehabilitation and Gut Rehabilitation) must be completed in a professional manner 3. A review of the engineer’s report (or functionally equivalent documentation) is not required for conversions involving: ■ A Gut Rehabilitation, and ■ A Non-Gut Rehabilitation if more than three years have elapsed since the legal creation of the project (h) Mortgagee consent 1. The Project Documents or applicable State law must provide that amendments of a material adverse nature to First Lien mortgagees be agreed to by mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) subject to First Lien Mortgages 2. The Project Documents or applicable State law must provide that any action to terminate the legal status of the project or to use insurance proceeds for any purpose other than to rebuild must be agreed to by First Lien mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) that are subject to First Lien Mortgages Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-46 3. The Project Documents may allow implied approval to be assumed when the then current mortgagee of record fails to submit a response to any written proposal for an amendment within 60 days after the then current mortgagee of record actually receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a “return receipt” requested (i) Rights of Condominium mortgagees and guarantors The Project Documents, applicable State law, or any applicable insurance policy must give the mortgagee and guarantor of the Mortgage on any unit in a Condominium Project the right to timely written notice of: 1. Any condemnation or casualty loss that affects either a material portion of the Condominium Project or the unit securing its Mortgage 2. Any 60-day Delinquency in the payment of assessments or charges owed by the owner of any unit for which it holds the Mortgage 3. A lapse, cancelation, or material reduction of any insurance policy maintained by the HOA 4. Any proposed action that requires the consent of a specified percentage of mortgagees (j) First mortgagee’s rights confirmed The Project Documents must not give a Condominium Unit owner or any other party priority over any rights of the first mortgagee of the Condominium Unit pursuant to its Mortgage in the case of payment to the unit owner of proceeds from termination, or insurance proceeds or condemnation awards for losses to or a taking of Condominium Units and/or Common Elements. (k) Requirements when a Seller relies on a project reserve study for New Condominium Projects The reserve study must comply with the following requirements: 1. The reserve study generally must include: ■ An inventory of major components of the project ■ Financial analysis and evaluation of current reserve fund adequacy; and ■ Proposed annual reserve funding plan 2. A reserve study’s financial analysis must validate that the project has appropriately allocated the recommended reserve funds to provide the Condominium Project with Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-47 sufficient financial protection comparable to Freddie Mac’s standard budget requirements for replacement reserves 3. The reserve study’s annual reserve funding plan, which details total costs identified for replacement components, must meet or exceed the study’s recommendation and conclusion 4. The most current reserve study (or update) must be dated within 36 months of the Seller’s determination that a Condominium Project is eligible (see Section 5701.2(a)(2)) 5. The reserve study must be prepared by an independent expert skilled in performing such studies (such as a reserve study professional, a construction engineer, a certified public accountant who specializes in reserve studies, or any professional with demonstrated experience and knowledge in completing reserve studies) 6. The reserve study must meet or exceed requirements set forth in any applicable state statutes 7. The reserve study must comment favorably on the project’s age, estimated remaining life, structural integrity and the replacement of major components If the Seller relies on a reserve study that meets the requirements of this section, the project’s budget must contain the highest recommended reserve allocation amount in the study to support the costs identified in the study. Reserve studies that establish a reserve funding goal that allows the reserve cash balance to approach but never fall below zero during the cash flow projection, referred to as baseline funding method, must not be used to waive the 10% reserve requirement. The Seller must obtain and retain in the Mortgage file a copy of the reserve study. The Seller must also perform an analysis of the study and retain this analysis in the Mortgage file. (l) Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects When a Seller relies on contributions to a working capital fund, the following requirements must be met: 1. The Project Documents must require the purchaser of a Condominium Unit to pay a non- refundable and non-transferable assessment to a working capital fund which must be established for the periodic maintenance, repair and replacement of the Common Elements 2. The assessment must be equal to a minimum of at least two months of the HOA fees attributable to the Condominium Unit and be due and payable at closing 3. The developer is in control of the HOA Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-48 (m)New Condominium Project sold with excessive Seller contributions If a builder, developer or property seller offers financing or sale arrangements (such as rent- backs, payments of principal, interest, taxes and insurance) for Condominium Unit Mortgages in a New Condominium Project these contributions must comply with the interested party contribution requirements of Section 5501.6. Note: If the requirements for New Condominium Projects in this Section 5701.6 are met, then the Seller is not required to comply with the requirements for any of the other project review types in Sections 5701.5 (Established Condominium Project reviews), 5701.7 (Exempt from review) and 5701.9 (Reciprocal project reviews). 5701.6: New Condominium Projects (Future effective date 01/04/27) Effective for Mortgages with Application Received Dates on or after January 4, 2027. This section contains: ■ Project completion requirements ■ Owner-occupancy requirements for New Condominium Projects ■ Project budget requirement for New Condominium Projects ■ Delinquent assessments for New Condominium Projects ■ Compliance with laws ■ Limitations on ability to sell/right of first refusal ■ Conversions ■ Mortgagee consent ■ Rights of Condominium mortgagees and guarantors ■ First mortgagee’s rights confirmed ■ Requirements when a Seller relies on a project reserve study for New Condominium Projects ■ Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-49 ■ New Condominium Project sold with excessive Seller contributions To be eligible for the New Condominium Projects review type, the Condominium Project must meet the definition of a New Condominium Project. In addition to the project review and eligibility requirements in Section 5701.2, Mortgages secured by Condominium Units in New Condominium Projects must comply with all of the following requirements: (a) Project completion requirements The subject legal phase (or the subject building) and any prior legal phases in which units have been offered for sale must be substantially complete. “Substantially complete” indicates that the Common Elements are complete and the units are complete subject to the selection of buyer preference items. For the purpose of determining project completion under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. (b) Owner-occupancy requirements for New Condominium Projects At least 50% of the total units in the project (or at least 50% of the sum of the subject legal phase and prior legal phases) must have been conveyed or must be under contract to purchasers who will occupy the units as their Primary Residences or second homes. For the purpose of calculating owner-occupancy under this Section 5701.6, a single building can only have one legal phase, regardless of whether the Condominium Project is comprised solely of that single building or multiple buildings. Legal phases are defined by the Project Documents. Construction or marketing phases developed for the convenience of the developer are not necessarily legal phases and are not eligible. (c) Project budget requirement for New Condominium Projects The project’s budget for the current fiscal year must comply with the following: 1. The Homeowners Association’s (HOA’s) assessments must begin once the developer has ceased to pay operating expenses attributable to the Condominium Project, whether or not all units have been sold. When any unit owner other than the developer pays assessments, the developer must pay the assessments attributable to the unsold units. 2. The project’s budget (or its projected budget if the project has not been turned over to the unit owners) must be consistent with the nature of the project Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-50 3. Appropriate assessments must be established to manage the project 4. There must be appropriate allocations for line items pertinent to the type and status of the Condominium Project 5. If the project was recently converted, the developer must have initially funded a working capital fund, through contributions made by the developer and/or purchasers of the Condominium Units, in an amount consistent with the estimated remaining life of the Common Elements 6. There must be adequate funding for insurance deductible amounts 7. At least 15% of the budget must provide funding for replacement reserves for capital expenditures and deferred maintenance based on the project’s age, estimated remaining life and replacement cost of major Common Elements Calculation of replacement reserve percentage Formula Exclusions The replacement reserve percentage is determined by dividing: (i) the annual budgeted replacement reserve allocation by (ii) the HOA’s annual budgeted assessment income (including regular common expense fees) The calculation may exclude: i. Special assessment income ii. Income allocated to or in reserve accounts iii. Incidental income not relied upon for maintenance operations or capital improvements; and iv. Amounts collected from unit owners (but usually paid individually by them) for items or utilities such as internet access 8. If the budget does not provide a replacement reserve of at least 15%, a Seller may rely on either: i. A reserve study, provided the conditions in Section 5701.6(k) below are met; or ii. Contributions to a working capital fund, provided the conditions in Section 5701.6(l) below are met. These contributions can be in addition to or in lieu of any working capital fund contributions made by the developer in the case of a recently converted project. Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-51 9. An HOA must not receive more than 10% of its budgeted income from the rental or leasing of commercial parking facilities (d) Delinquent assessments for New Condominium Projects (i) HOA assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of their HOA assessments. (ii) Special assessments No more than 15% of the total number of units in a project are 60 or more days delinquent in the payment of each special assessment. (e) Compliance with laws The Condominium Project has been created and exists in full compliance with the applicable State law, the requirements of the jurisdiction in which the Condominium Project is located, and with all other applicable laws and regulations governing creation of the Condominium Project. (f) Limitations on ability to sell/right of first refusal Any right of first refusal in the Project Documents will not adversely impact the rights of a mortgagee or its assignee to: ■ Foreclose or take title to a Condominium Unit pursuant to the remedies in the Mortgage ■ Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; or ■ Sell or lease a unit acquired by the mortgagee or its assignee (g) Conversions For a Condominium Project that was created by conversion of a building(s) with a prior use, the following requirements must be met for the Seller’s review and determination of project eligibility: 1. For a conversion involving a Non-Gut Rehabilitation of a prior use of the building that was legally created within the past three years, the engineer’s report (or functionally equivalent documentation for jurisdictions that do not require an engineer’s report) must state: ■ That the project is structurally sound Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-52 ■ The condition and remaining useful life of the major project components are sufficient to meet the residential needs of the project; and ■ That there is no evidence that any of these conditions have not been met Note: Major components include the roof, elevators and mechanical systems such as HVAC, plumbing and electricity. 2. All rehabilitation work involved in the conversion (Non-Gut Rehabilitation and Gut Rehabilitation) must be completed in a professional manner 3. A review of the engineer’s report (or functionally equivalent documentation) is not required for conversions involving: ■ A Gut Rehabilitation, and ■ A Non-Gut Rehabilitation if more than three years have elapsed since the legal creation of the project (h) Mortgagee consent 1. The Project Documents or applicable State law must provide that amendments of a material adverse nature to First Lien mortgagees be agreed to by mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) subject to First Lien Mortgages 2. The Project Documents or applicable State law must provide that any action to terminate the legal status of the project or to use insurance proceeds for any purpose other than to rebuild must be agreed to by First Lien mortgagees that represent at least 51% of the unit votes (based on one vote for each first Mortgage owned) that are subject to First Lien Mortgages 3. The Project Documents may allow implied approval to be assumed when the then current mortgagee of record fails to submit a response to any written proposal for an amendment within 60 days after the then current mortgagee of record actually receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a “return receipt” requested (i) Rights of Condominium mortgagees and guarantors The Project Documents, applicable State law, or any applicable insurance policy must give the mortgagee and guarantor of the Mortgage on any unit in a Condominium Project the right to timely written notice of: Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-53 1. Any condemnation or casualty loss that affects either a material portion of the Condominium Project or the unit securing its Mortgage 2. Any 60-day Delinquency in the payment of assessments or charges owed by the owner of any unit for which it holds the Mortgage 3. A lapse, cancelation, or material reduction of any insurance policy maintained by the HOA 4. Any proposed action that requires the consent of a specified percentage of mortgagees (j) First mortgagee’s rights confirmed The Project Documents must not give a Condominium Unit owner or any other party priority over any rights of the first mortgagee of the Condominium Unit pursuant to its Mortgage in the case of payment to the unit owner of proceeds from termination, or insurance proceeds or condemnation awards for losses to or a taking of Condominium Units and/or Common Elements. (k) Requirements when a Seller relies on a project reserve study for New Condominium Projects The reserve study must comply with the following requirements: 1. The reserve study generally must include: ■ An inventory of major components of the project ■ Financial analysis and evaluation of current reserve fund adequacy; and ■ Proposed annual reserve funding plan 2. A reserve study’s financial analysis must validate that the project has appropriately allocated the recommended reserve funds to provide the Condominium Project with sufficient financial protection comparable to Freddie Mac’s standard budget requirements for replacement reserves 3. The reserve study’s annual reserve funding plan, which details total costs identified for replacement components, must meet or exceed the study’s recommendation and conclusion 4. The most current reserve study (or update) must be dated within 36 months of the Seller’s determination that a Condominium Project is eligible (see Section 5701.2(a)(2)) 5. The reserve study must be prepared by an independent expert skilled in performing such studies (such as a reserve study professional, a construction engineer, a certified public Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-54 accountant who specializes in reserve studies, or any professional with demonstrated experience and knowledge in completing reserve studies) 6. The reserve study must meet or exceed requirements set forth in any applicable state statutes 7. The reserve study must comment favorably on the project’s age, estimated remaining life, structural integrity and the replacement of major components If the Seller relies on a reserve study that meets the requirements of this section, the project’s budget must contain the highest recommended reserve allocation amount in the study to support the costs identified in the study. Reserve studies that establish a reserve funding goal that allows the reserve cash balance to approach but never fall below zero during the cash flow projection, referred to as baseline funding method, must not be used to waive the 15% reserve requirement. The Seller must obtain and retain in the Mortgage file a copy of the reserve study. The Seller must also perform an analysis of the study and retain this analysis in the Mortgage file. (l) Requirements when a Seller relies on contributions to a working capital fund for New Condominium Projects When a Seller relies on contributions to a working capital fund, the following requirements must be met: 1. The Project Documents must require the purchaser of a Condominium Unit to pay a non- refundable and non-transferable assessment to a working capital fund which must be established for the periodic maintenance, repair and replacement of the Common Elements 2. The assessment must be equal to a minimum of at least two months of the HOA fees attributable to the Condominium Unit and be due and payable at closing 3. The developer is in control of the HOA (m)New Condominium Project sold with excessive Seller contributions If a builder, developer or property seller offers financing or sale arrangements (such as rent- backs, payments of principal, interest, taxes and insurance) for Condominium Unit Mortgages in a New Condominium Project these contributions must comply with the interested party contribution requirements of Section 5501.6. Note: If the requirements for New Condominium Projects in this Section 5701.6 are met, then the Seller is not required to comply with the requirements for any of the other project review types in Sections 5701.5 (Established Condominium Project reviews), 5701.7 (Exempt from review) and 5701.9 (Reciprocal project reviews). Freddie Mac Single-Family Seller/Servicer Guide Chapter 5701 As of 05/06/26 Page 5701-55

Source: Freddie Mac Single-Family Seller/Servicer Guide Section 5701.6 — New Condominium Projects · source URL · snapshot 5869ee9e606cd4ae