Too little of the budget going to reserves

The test is arithmetic

Of everything written about condominium reserves, one number is an actual pass-or-fail test in a mortgage file, and it is not percent funded. It is the proportion of the annual budget allocated to replacement reserves.

The calculation Fannie Mae specifies is the annual budgeted replacement-reserve allocation divided by annual budgeted assessment income. The budget must provide replacement reserves for capital expenditures and deferred maintenance of at least the required percentage. Nothing in that calculation looks at how much money is in the reserve account, how old the roof is, or what a reserve study recommends. It looks at one line in this year's budget against another line in this year's budget.

That makes it unusually legible. A buyer who can read a budget can compute it, which is not true of most agency project tests. It also makes it unusually brittle: an association can be sitting on a healthy reserve balance built over decades and still fail, because the test measures the current year's decision rather than the accumulated result of past ones.

Both government-sponsored enterprises apply the same idea. Freddie Mac requires the budget to allocate 10 percent to reserves, for both established and new projects, and states explicitly that special assessments cannot substitute for reserves. Fannie Mae has applied 10 percent as well, and is raising it.

Ten percent now, fifteen percent from January

This is the single most date-sensitive number on the topic, and stating it without a date makes a page wrong for part of the year.

Now, and through the end of 2026: the Fannie Mae Selling Guide topic governing the Full Review process, published 5 August 2026, requires replacement reserves of at least 10 percent of the budget. Freddie Mac's published guidance requires 10 percent for established and new projects alike, with no analogue to Fannie Mae's increase found as of 17 August 2026.

From 4 January 2027: Fannie Mae Lender Letter LL-2026-03, dated 18 March 2026, raises the replacement-reserve minimum from 10 percent to 15 percent of annual budgeted income, and states that lenders must comply when using the Full Review process for all loan applications dated on or after 4 January 2027.

Both figures are correct. Which one applies to a particular purchase turns on the application date, not the closing date and not the contract date. A buyer applying in December 2026 is measured against 10 percent; a buyer applying the following month against 15 percent, on the same building with the same budget. That is a real and unusual planning point, and it is worth asking a lender directly which ruleset an application falls under.

A further consequence follows from a different 2026 change. On 3 August 2026, Fannie Mae retired its Limited Review and Freddie Mac retired its Streamlined Review. Those abbreviated paths did not run the full battery of project tests. With both retired, projects that used to slip past a reserve examination now get one, and the reserve line is computed on buildings where nobody had computed it before. The population of projects exposed to this test grew sharply this month, and it grows again in January when the threshold moves.

What it means for financing

A reserve allocation below the required percentage is a stated cause of project ineligibility. Fannie Mae's original post-Surfside lender letter, issued 13 October 2021, listed reserve funding below 10 percent without an approved exception among its ineligibility triggers, and those requirements were folded into the Selling Guide permanently by an announcement dated 5 July 2023, effective for applications on or after 18 September 2023. These are not expired emergency measures; they are standing policy.

There is one documented route around the percentage. Fannie Mae permits a lender to substitute an acceptable reserve study showing adequate funded reserves that meet or exceed the study's recommendations, where the study was completed within three years of the project approval. That is the escape valve for an association whose study genuinely supports a lower contribution. It requires a current study, and it requires the funded position to match what the study says it should be, which is a materially harder standard than simply owning a study.

Other rulebooks handle reserves differently, and the differences matter because a project that fails one may clear another. FHA frames its reserve test against twelve months of unit assessments rather than as a percentage of budget. It is structurally the same idea but a separate rule, and the percentage itself is not printed on the form HUD publishes; figures circulating for it are widely republished but unconfirmed, so any specific FHA reserve percentage a buyer is quoted is worth verifying with the lender against the current handbook. VA takes a different approach again: its regulations require the association to maintain adequate reserve funds and set one hard numeric requirement, working-capital reserves of at least two months' estimated charges per unit. There is no VA percentage-of-budget test.

Reserve line against percent funded

These two numbers get used interchangeably and they measure opposite things.

The reserve line is a flow. It is what the association is putting in this year, expressed against what it is collecting this year. It is forward-looking, it is a decision the board makes annually, and it is what the agencies test.

Percent funded is a stock. It is what the association has accumulated, expressed against what accumulated wear says it ought to have. It is backward-looking, it is the product of every funding decision made since the building went up, and no agency tests it.

Both directions of mismatch occur in practice. An association that has just adopted a serious reserve contribution after twenty years of waivers passes the budget test comfortably while sitting at a low percent funded. An older, mature association with a large accumulated fund and a modest remaining component list can hold a strong percent funded and still allocate less than 10 percent of the current budget, and fail. Neither result is a contradiction. They are answers to different questions, and a buyer needs both.

The practical reading: the reserve line tells you whether the loan will clear. Percent funded tells you whether a special assessment is coming. It is entirely possible for a project to clear financing and still be heading for an assessment, and that combination is common enough that it deserves to be said out loud.

What people get wrong

The denominator is budgeted assessment income, not total revenue. Associations with meaningful non-assessment income from parking, laundry, commercial rent or antenna leases sometimes compute the ratio against everything coming in, which produces a flattering number that does not match the test.

A special assessment does not count. Freddie Mac states this explicitly. An association funding its capital programme through periodic special assessments rather than through the budget is not meeting the reserve requirement, however sound its capital planning may be in substance.

Funding to the study is not automatically enough. The study route has conditions attached: the study must be current within three years of project approval, and reserves must actually be funded to meet or exceed the study's recommendations. An association that says it funds according to its reserve study may be describing a baseline plan that produces a contribution well under the percentage, without the funded position to support the substitution.

Florida's alternative funding methods satisfy Florida, not the agencies. Florida permits reserves for a required structural study to be funded by regular assessments, by special assessment, by line of credit or by loan, with anything other than regular assessments requiring a majority vote of the total voting interests. Where a line of credit is used in lieu of funding reserves annually, owners must be given clear notice that reserves will not be funded annually, that credit will be used instead, and of the amount of projected future assessments, and a secured line of credit must be disclosed to subsequent purchasers. Those are Florida compliance mechanisms. None of them puts cash in a reserve line that an underwriter divides by assessment income.

Florida's post-milestone pause is a deferral, not a holiday. For budgets adopted on or before 31 December 2028, an owner-controlled association that completed a milestone inspection within the previous two calendar years may temporarily pause or reduce reserve contributions for no more than two consecutive annual budgets, on a majority vote of the total voting interests, and only to fund the repairs that inspection recommended. Before contributions resume, the association must obtain an updated structural reserve study to determine future funding needs. The mechanism does not apply to developer-controlled associations or to those with a bulk assignee or bulk buyer. It redirects money into mandated repairs; it does nothing for the budget line a lender is about to compute.

It is not a permanent condition. This finding, unlike most causes of non-warrantability, is curable by decision. A board can adopt a revised budget with a compliant reserve allocation, and the project can be re-reviewed. It is not free, because the money comes from assessments and assessments come from owners, but no engineering, litigation settlement or construction work stands between the association and the fix.

What to do about it

For a buyer under contract, four steps in order.

• Compute it. Take the reserve or replacement-reserve line from the adopted annual budget and divide it by budgeted assessment income. You will know before the lender does.
• Ask the lender which ruleset your application date falls under. With the threshold moving on 4 January 2027 and the abbreviated review paths retired on 3 August 2026, the answer is genuinely different depending on when the application is dated.
• Ask the board what it intends to do. Boards facing a review failure frequently amend the budget, because the alternative is that no buyer in the building can obtain conventional financing. Board minutes and any draft budget for the next fiscal year will show whether that conversation is happening.
• Ask whether the association intends to rely on its reserve study instead, and if so, when the study was completed and whether reserves are funded to its recommendations.

Where the numbers are close to the line, or where an association's accounting makes the reserve line hard to identify, the question belongs to the lender's project review team rather than to the buyer. Only the lender can certify the project, and only the lender knows which review path and which effective date apply to the file. A buyer cannot self-verify warrantability for conventional financing at all: Fannie Mae's project tool is restricted to lenders, its status tool serves associations and their managers rather than buyers, and Freddie Mac's equivalent is seller-facing. The productive questions are directed at the lender and at the association.

Common questions

An independent reference. This site performs no inspections, reviews no documents, and is not affiliated with any association, lender, insurer or management company. Who publishes this.