Fannie Mae stopped accepting baseline funding. What does our board do now?

From August 3, 2026, Fannie Mae no longer accepts reserve studies that rely on baseline funding, the method that lets a reserve balance run down toward zero between projects. If your association's current study recommends a baseline plan, buyers in your community may be unable to get conventional loans until the board acts. There are two ways to fix it: pass the reserve budget test directly, by putting at least 10% of annual assessment income into reserves (15% for loan applications dated on or after January 4, 2027), or obtain a current reserve study that uses a stronger funding method and set the budget at that study's highest recommended reserve contribution. The rule applies to loan applications dated on or after August 3, 2026, so it affects the next sale in your community, not past ones.

What changed

Fannie Mae Lender Letter LL-2026-03, issued March 18, 2026, made two changes effective for loan applications dated on or after August 3, 2026:

Baseline funding is no longer permitted. The letter defines it as the funding option that allows the reserve cash balance to approach, but never fall below, zero. It was the least expensive option and the one many studies were built on.

The Limited Review process is retired. Established condo projects that are not waived now go through Full Review, where the reserve requirements below apply. Many associations that previously passed a streamlined review now face the full test for the first time.

How to tell if your association is affected

Open your current reserve study and find the funding plan section. You are looking for two things:

1. The funding goal. It will be named baseline, threshold, or full funding. If the plan's projected balance touches or nearly touches zero in any year, it is a baseline plan even if the label differs.
2. The study date. Fannie Mae requires the study to be no more than three years old, measured from the date the lender approves the project, not the date the buyer applies. A study near the three-year mark can expire mid-transaction.

If the study is baseline, or older than three years, your association is affected.

Path 1: pass the budget test directly

Your budget passes if the annual reserve allocation is at least 10% of annual budgeted assessment income. For loan applications dated on or after January 4, 2027, the requirement rises to 15%.

The denominator is where boards get this wrong. It is assessment income, the regular common expense fees, not the operating budget and not total expenses. Four kinds of income may be excluded from the denominator before you divide:

• incidental income the association does not rely on for operations, maintenance, or capital improvements
• income collected for utilities an owner would normally pay directly, such as cable or internet
• income already allocated to reserve accounts
• special assessment income

Backing out those exclusions can move an association from failing to passing without changing a dollar of reserve funding. Run the arithmetic both ways before concluding you fail.

Path 2: replace or update the study

A reserve study can substitute for the budget test, but all of the following must hold:

1. The study is current: no more than three years old, measured from lender approval.
2. It uses a funding method other than baseline.
3. It contains the six elements Fannie Mae requires: all major common-area components; the condition and remaining useful life of each; estimated repair or replacement cost; estimated total annual contributions required, net of existing reserves and including inflation; an analysis of existing funded reserves; and a suggested funding plan.
4. It was prepared by an independent third party with demonstrated reserve study expertise.
5. As of August 3, 2026, your budget actually includes the highest recommended reserve contribution in the study. A study on the shelf that the budget ignores does not qualify.

Why act before anyone lists a unit

Nothing about this rule announces itself. An association out of compliance finds out when an owner's buyer is denied conventional financing mid-transaction, often days before closing. At that point the buyer pool narrows to cash and portfolio lending, the sale usually collapses, and every owner's unit value is exposed. The board that acts at budget season, instead of at the closing table, controls the timeline and the cost.

What the board should do this month

1. Pull the current reserve study. Identify the funding method and the completion date.
2. Run the budget test: reserve allocation divided by assessment income, with the four exclusions backed out.
3. If either path fails, put a study update ahead of your next budget adoption. The threshold rises to 15% on January 4, 2027, so a study commissioned now should be built to clear both dates at once.
4. If you are unsure where you stand, run a standing check. It takes about three minutes and tells you which criteria you miss.

Common questions

Does this apply if nobody in our community is selling right now? Yes, at the next sale. The rule attaches to loan applications, so it is dormant until a unit goes under contract with a financed buyer, and then it is immediate.

Do we have to commission a new study today? Not necessarily. If your budget passes the 10% test (15% from January 4, 2027), no study is required for this criterion. The study path exists for associations that cannot or prefer not to meet the budget line directly.

Our study is fine but four years old. Are we affected? Yes. Currency is its own requirement. A well-built study older than three years no longer satisfies review.

We cannot reach 15% by 2027. What are the options? The study substitution path was built for this case: a current, non-baseline study whose highest recommended contribution your budget funds, even if that figure is below 15% of assessment income.

Sources

• Fannie Mae Lender Letter LL-2026-03, March 18, 2026. Effective dates: August 3, 2026 (baseline funding, Limited Review retirement, highest-recommendation requirement) and January 4, 2027 (15% reserve allocation). https://singlefamily.fanniemae.com/media/44986/display
• Fannie Mae Selling Guide B4-2.2-02, Full Review Process, version April 2, 2025. Where the Guide and the Lender Letter differ, the Lender Letter governs until the Guide is republished. https://selling-guide.fanniemae.com/sel/b4-2.2-02/full-review-process

Reviewed on July 30, 2026.