Chicago condo financing · Reserve rule
Chicago Condo Associations and the 15% Reserve Rule: What to Check Before January 4, 2027
Short answer: For applicable loan applications dated on or after January 4, 2027, Fannie Mae and Freddie Mac are increasing the minimum annual replacement reserve allocation from 10% to 15% of budgeted assessment income. An eligible reserve study may provide an alternative.
Chicago condo boards adopting 2027 budgets should review these requirements now. A budget that falls short may affect financing options for buyers.
What changes on January 4, 2027?
The higher reserve allocation applies to condominium projects subject to the agencies' applicable full project review requirements. Replacement reserves help fund major repairs, replacements, and deferred maintenance.
This is a mortgage eligibility standard, not a blanket legal requirement for every Chicago condominium association. Project review exemptions and other program requirements may apply.
May a reserve study support a different allocation?
An eligible reserve study may support an allocation below 15%. When using this alternative, the budget must include the study's highest recommended reserve allocation.
A recommendation based on baseline funding, which allows reserves to approach but not fall below zero, is not acceptable under this alternative. The study and budget must also meet the applicable lender and agency requirements.
Why review the budget this fall?
A budget adopted this fall may be the budget a buyer's lender reviews in 2027. Identifying a shortfall before adoption may give the board more time to consider changes.
The Illinois Condominium Property Act requires owners to receive the proposed annual budget at least 25 days before adoption, with intended reserve allocations identified. Boards should coordinate notice and adoption requirements with their management company and association attorney.
How much might assessments increase?
The impact depends on operating expenses, existing reserve contributions, and the association's funding plan.
For illustration, assume a building collects $300,000 annually, allocates $30,000 to reserves, and spends $270,000 on operations. With operating expenses unchanged, annual assessment income would need to reach approximately $317,650 to allocate 15% to reserves.
That is an increase of approximately 6%, averaging about $49 per unit per month in a 30-unit building. Actual charges depend on each unit's allocated share. This example is not a recommended budget or an estimate for a particular association.
What should condo boards check?
- Reserve allocation: Divide budgeted replacement reserve contributions by annual budgeted assessment income.
- Reserve study: If relying on a study, have the lender confirm its eligibility and required funding.
- Budget presentation: Identify replacement reserves as a separate line.
- Adoption process: Review proposed changes with the management company and association attorney.
What should buyers, sellers, and agents do?
Request the current or proposed 2027 budget and any reserve study early. Have the lender review the building's documentation before relying on a particular financing option.
If a project does not meet one program's requirements, other financing may be available. Eligibility, rates, fees, down payments, and project review standards vary. Meeting the reserve requirement does not guarantee project or loan approval.
Frequently Asked Questions
Does the rule apply to small condo buildings?
Certain projects with 10 or fewer units may qualify for a project review waiver or exemption. Restrictions apply, including conditions involving a master association or larger development. The lender should confirm eligibility.
Which date determines whether the new requirement applies?
The agencies specify loan application dates on or after January 4, 2027. Closing date alone does not determine applicability. Ask the lender which requirements apply to your transaction.
Do all mortgage programs use the same reserve standard?
No. Federal Housing Administration, Department of Veterans Affairs, jumbo, and other mortgage programs have their own project eligibility requirements. Confirm the current standards for the specific loan.
May an association address a shortfall later?
A revised budget or eligible reserve study may help address a reserve-related concern. The lender must review the updated documents and confirm that all applicable requirements are satisfied.
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References
- Fannie Mae, Lender Letter LL-2026-03: Reserve allocation increase, January 4, 2027 effective date, reserve study requirements, and project review changes. Read the lender letter.
- Freddie Mac, Guide Bulletin 2026-C: Corresponding condominium reserve and project review requirements. Read the bulletin.
- Illinois Condominium Property Act, Section 18(a)(6): Proposed annual budget notice and identification of reserve allocations. Read the statute.
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