Are Reserve Studies required for condominium projects?

Reserve Studies are not automatically required for project approval with the exception of non-gut and gut rehabilitation conversions.

To demonstrate Financial Stability, FHA requires ALL Condominium Projects to have financial documents that itemize and address income and expenditures that are sufficient and pertinent to the Condominium Project including:
  • an operating income that demonstrates a stable income stream over the past two years with decreases of no higher than 15 percent;
  • ability to cover the cost of insurance coverage and deductibles;
  • a reserve account for capital expenditures and deferred maintenance that is funded with at least 10 percent of the aggregate monthly Unit assessments, unless a lower amount is deemed sufficient based upon an acceptable reserve study;
  • evidence that the budget provides for the periodic funding to maintain the reserve account balance of at least 10 percent of the aggregate monthly Unit assessments, unless a lower amount is deemed sufficient based upon an acceptable reserve study;
  • evidence that no more than 15 percent of the total Units are Units in Arrears (does not include late fees or other administrative expenses); and
  • financial records that are consistent with the application package, including special assessments, loans, or other financial variations.
If a reserve study is required to justify a reserve account funded less than 10 percent, it must:
  • be 36 months old or fewer;
  • include a site visit;
  • demonstrate that the Condominium Project has adequate funded reserves that provide financial protection for the Condominium Project equivalent to the reserve requirements;
  • demonstrate that the Condominium Project’s funded reserves meet or exceed the recommendations included in the reserve study; and
  • be prepared by an independent third party that has demonstrated knowledge of, and experience completing, reserve studies.
For case numbers assigned October 15, 2019 and after, additional information regarding condominium project financial stability and controls can be located in: Handbook 4000.1, Section II.C.2.c.v available at:  https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

For case numbers assigned prior to October 15, 2019, information is available in:
  • Mortgagee Letter (ML) 2011-22 Condominium Approval Process for Single Family Housing – Consolidation and Update of Approval Requirements and the attached Condominium Project Approval and Processing Guide provides the requirements and procedures for obtaining FHA condominium project approval.
  • ML 2012-18 Temporary Approval Provisions for FHA Condominium Project Approval provides temporary condominium project approval guideline changes to address current housing market conditions.
  • ML 2015-27 Additional Temporary Approval Provisions for FHA Condominium Project Approval
  • ML 2016-15 FHA Condominium Project Approval – Owner Occupancy Requirements modifies the Condominium Project Approval and Processing Guide, attachment to ML 2011-22, in order to implement the Housing Opportunity Through Modernization Act of 2016 (HOTMA) requirements and establish the required owner-occupancy percentage that must be met for purposes of FHA project approval.
Note: The Temporary Provisions in ML 12-18 and ML 15-27, as modified by ML 2016-15, are effective until HUD publishes and implements the Final Rule of Condominium Project Approval through publication of the Condominium Project Approval Section of HUD Handbook 4000.1, as extended by ML 2017-13.  Mortgagee Letters are available at:  https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee

For more information see:

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-02375