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New Capital Reserve Requirements for Condominiums
Condominium Associations have new capital reserve funding requirements to comply with Fannie Mae guidelines. Since about 75% of all mortgage loans used to purchase or refinance condominium units are covered by Fannie Mae guidelines, it is important for boards to know and follow these new reserve requirements. I have discussed Fannie Mae guidelines for maintenance following the Surfside, Florida tower collapse. In March 2026, Fannie Mae revised their guidelines for capital reserve contributions. Together, these two changes are meant to ensure associations adequately fund and perform critical maintenance items.
Starting January 4, 2027, condominium associations must budget at least 15% of their annual assessment income to go to capital reserve. This has to be part of a regular assessment – special assessments cannot be used to meet this minimum funding requirement.
An association can choose to budget less than this 15% only if it follows the recommendations of a reserve study. In order to depend on the reserve study, it has to be completed in the last three years. And the association cannot rely on the “baseline funding” level of assessments in the reserve study.
There are established guidelines for reserve studies. Generally, a reserve study looks at when a capital item will need to be replaced, and how much it will cost. Then the reserve study tells the association how much money it should have so it can make the replacements. Reserve studies typically have three methods to fund this required amount: Full funding, threshold funding, and baseline funding. Baseline funding is (to oversimplify) a method where the association completely wipes out their capital reserve to fund a project and then starts building the fund back up again. The other two methods do not allow the reserve fund to empty. Of course, the baseline method requires the least amount of assessments if the capital reserve is already underfunded. Under the new Fannie Mae guidelines, this is not allowed to be used.
These requirements apply to any condominium with more than four units, where the units share walls (i.e. “attached units”).
Because Fannie Mae covers most condominium loans, it is important for a condominium to meet the requirements. Right now, Fannie Mae requires 10% of assessments to be put into capital reserves. Yet many associations do not fund their capital reserves at this level or have a current reserve study. But the owners in these associations have not had any problems financing their units. So why should associations start worrying about this now?
The reason that the capital reserve is important now is because Fannie Mae is forcing lenders to look at them. Starting in August 2026, Fannie Mae stopped allowing “Limited Reviews” of condominium projects. That means that every condominium loan will go through a “Full Review.” This means lenders will look much more closely at the association’s capital reserves, their annual contributions, and any deferred maintenance. If your community has never commissioned a reserve study or does not contribute 15% to its capital reserve fund, lenders may not approve mortgages in the community. This could create challenges for unit owners looking to sell or refinance, as potential buyers may have difficulty obtaining financing for units in associations that do not meet Fannie Mae’s requirements. Even if this was never a problem before, Fannie Mae has made this an emphasis moving forward. Since this is association budget season, your association should provide for adequate capital reserve funding and give serious thought to getting a reserve study done.
Here is Fannie Mae’s explanation and warning:
In 2023, we incorporated significant deferred maintenance and unsafe condition (i.e., critical repairs) requirements for condo projects into the Selling Guide. Since then, we have seen a correlation between condo projects with underfunded reserves for capital expenditures and those in need of critical repairs. Condo projects with inadequate reserves typically do not have the requisite resources to maintain the physical condition of the project or to fund unexpected operating expenses. As a result, unit owners can experience substantial financial hardship from unexpected special assessments or higher regular assessments or dues, leading to mortgage default or foreclosure.
Fannie Mae is right on the mark with this warning. Many associations under-fund their capital reserves – especially associations that are just turned over from the original developer. It may seem great to keep assessments low. But at some point, all of those associations face a budget crisis. Too often, associations only pay attention to their capital reserve when repair work needs to be performed. And then the entire bill comes all at once, to the owners who may desperately need work.
As associations begin reviewing their budgets and planning for these changes, it is important to understand not only what the new requirements involve, but also how they may affect the community moving forward. RKG Law regularly works with condominium associations on these types of issues and can help boards navigate questions as they arise.