New Fannie Mae Rules for Hawaii Condo Owners

This has been one of the biggest areas of confusion. I've heard from owners who understandably say, “Our association has plenty of money in reserves, so we're fine.”

Having substantial reserves is absolutely positive. But there are two different issues:

• Reserve balance: How much money does the association already have saved?
• Annual reserve funding: How much does the association budget to contribute to reserves each year?

Beginning January 4, 2027, Fannie Mae's standard reserve test for applicable Full Reviews will require at least 15% of annual budgeted assessment income to be allocated to replacement reserves. Therefore, having a large reserve account does not, by itself, satisfy the 15% standard test.

This is an important distinction: failing the 15% calculation does not automatically make a condominium project ineligible. Fannie Mae allows an acceptable reserve study to be used to demonstrate that the association has adequate reserves when its annual budget does not meet the standard percentage requirement.

However, Fannie Mae has tightened the rules surrounding this alternative. When a reserve study is used, the association's budget must fund the highest recommended reserve allocation contained in the study. And there is another significant change: lenders may no longer use the baseline funding methodology to establish reserve adequacy for this exception.

Reserve studies generally use one or more methods to determine how much an association should be putting aside for future repairs and replacements.

• Baseline funding allows the reserve balance to decline toward zero over time, provided it never actually falls below zero.
• Threshold funding maintains reserves above a specified dollar amount or percentage-funded level.
• Full funding seeks to maintain reserves at or near 100% funded based upon projected future obligations.

For loans with application dates on or after August 3, 2026, Fannie Mae no longer permits lenders to rely on the baseline methodology when a reserve study is being used as the exception to its standard reserve requirement. If a reserve study provides more than one funding recommendation, for example both threshold and full funding, the budget must support the highest recommended contribution.

Hawaii condominium associations have their own state requirements governing reserves, and some associations use cash-flow or baseline-style approaches to determine reserve funding. That creates an important distinction:

Compliance with Hawaii reserve requirements does not necessarily mean compliance with Fannie Mae's lending requirements.

An association may have millions of dollars in reserves and may be operating under a reserve plan it considers financially sound. But if the association doesn't meet Fannie Mae's standard annual reserve allocation and relies upon a reserve-study methodology Fannie Mae won't accept as an alternative, financing for individual units could potentially be affected.

In other words: Lots of money in reserves does not automatically equal Fannie Mae compliance.

The underlying goal is fairly straightforward. Fannie Mae has identified a relationship between inadequately funded condominium reserves and projects experiencing significant deferred maintenance or critical repairs.

Stronger reserves are intended to help associations maintain their buildings, address major repairs when necessary and reduce the likelihood of owners suddenly facing enormous special assessments. From that perspective, there are real benefits to the changes:

• Better-funded reserves
• More proactive maintenance
• Greater attention to the long-term physical condition of buildings
• Potentially fewer unexpected special assessments
• Stronger long-term financial planning

A well-managed association with healthy reserves is starting from a much stronger position.

One of Fannie Mae's March 2026 changes may actually help certain resort condominium projects. Fannie Mae retired its previous 50% investment-property concentration limit for established condominium projects undergoing Full Review on investor loans.

That means an established condominium project is no longer automatically subject to that particular 50% investor-concentration restriction simply because a high percentage of units are investor-owned. This could be meaningful in Hawaii resort communities, where second homes, vacation properties and investment ownership are common.

There is an important exception: Fannie Mae's separate 50% presale requirement to principal-residence or second-home purchasers continues to apply to new and newly converted condominium projects.

This is where condominium owners should pay attention. If a project has difficulty satisfying Fannie Mae's requirements, it does not necessarily mean a unit can't be sold or financed. Other financing options may be available, including portfolio or other non-conforming lending programs.

But fewer financing options can potentially mean:

Fewer eligible buyers, a smaller buyer pool, more difficult transactions, and potential pressure on marketability and value.

That's why these changes matter even to an owner who has no mortgage and no intention of refinancing. Your future buyer may need financing.

Rather than simply asking your board or management company, “How much money do we have in reserves?” I would ask:

“Will our 2027 budget and reserve study meet Fannie Mae's new reserve requirements?”

Some helpful follow-up questions include:

• What percentage of annual assessment income is currently allocated to reserves?
• What funding methodology does our reserve study use?
• Does the reserve study rely on baseline or cash-flow funding?
• What annual reserve contribution does the study recommend?
• If there are multiple recommendations, what is the highest?
• Is the association reviewing its 2027 budget in light of Fannie Mae's new requirements?

Not necessarily. These changes are not a reason for every condominium owner to rush to sell. A financially healthy, well-managed association may be able to adapt to the new requirements without significant difficulty.

But if you have already been considering selling, I believe it is worth understanding your association's position before January 4, 2027. If an association is underfunding its annual reserves, relies upon a baseline funding methodology, has significant deferred maintenance, or may otherwise have difficulty meeting Fannie Mae project requirements, timing could become an important part of the selling conversation.

The most important thing right now is simply to know where your condominium project stands.