In March, Fannie Mae and Freddie Mac updated the rules governing condo lending standards as they attempt to fine tune underwriting guidelines that were revised after the Surfside condo collapse in 2021 and again in 2023. On Aug. 3, some of the most significant changes went into effect, despite protests from some industry groups.
In announcing the latest changes in a Lender Letter, Fannie Mae said its primary aims are to provide lenders and servicers with greater flexibility and operational simplicity, ensure borrowers and homeowner’s associations have adequate insurance and promote the financial resilience and long-term sustainability of condo projects.
“Simply put, condo deals that worked in the past don’t work anymore,” Rate Mortgage President Shant Banosian said. “For lenders, that means more documentation and project-level review. For HOAs, it means budgets, reserves, insurance and property condition need to be reviewed, updated and better documented. And for buyers, sellers and agents, it means getting that information upfront is becoming critical because a well-qualified buyer will run into a financing issue if the project doesn’t meet the guidelines.”
Industry pushback
Trade groups balked at some of the changes, arguing they are too burdensome, too expensive and being implemented too soon.
In a July 9 letter to FHFA Director Bill Pulte, The Community Home Lenders of America, Community Associations Institute and National Association of Mortgage Brokers wrote that the changes could increase costs for borrowers and existing owners, reduce lender participation and limit financing availability. The groups asked for the changes to be delayed or modified.
Eliminating Limited Review
One of the most significant — and controversial — changes was the elimination of Limited Review, which went into effect Aug. 3. Under Limited Review, certain qualifying condo projects seeking financing were able to go through a streamlined review process with less documentation and checks. Now, all projects are required to complete the more cumbersome Full Review.
This one-size-fits-all approach to underwriting fails to account for the wide variety of condominium types and locations, the industry groups wrote, adding that while an oceanfront high-rise and a Midwestern garden apartment-style condo don’t carry the same financial risks, they’re now treated like they do.
“Eliminating Limited Review means more condo transactions will require a deeper look at the HOA, its reserves and its documentation,” said Jeremy Olsher, broker associate and principal of Mizner Residential Group at Compass in Boca Raton. “For well-run associations, that should be manageable. For buildings with thin reserves or incomplete records, it could mean longer financing timelines, higher HOA contributions or assessments, and potentially a smaller pool of financed buyers. From an agent’s perspective, that makes reviewing the building’s financial position early in the transaction much more important.”
Higher reserves
Another change that has not been met with much enthusiasm from the condo community is a higher reserve requirement. Projects reviewed under the Full Review process will now have to increase their reserves from 10% to 15% of their annual budgets.
“Fannie Mae has specifically cited a correlation between underfunded reserves and projects with critical repairs,” Banosian said. “The goal is to make sure larger projects have the financial resources to maintain the property, handle major repairs and reduce the likelihood of large, unexpected assessments that can ultimately create risk for homeowners and lenders.
HOAs, which use the reserves to pay for deferred maintenance and capital expenditures, may also choose to conduct a study to determine the proper reserve level as long as it uses the highest estimate from the study.
The new reserves rule will go into effect Jan. 1, 2027.
In a recent memo, the National Association of REALTORS® called the 50% increase in required reserves and the short timeframe for HOAs to comply with the mandate “problematic”: “This problem will have a particularly acute effect on low- and moderate-income condo owners; those on fixed incomes like retirees; and regions facing other financial stresses like rising insurance rates and taxes.”
Todd Luong, an agent with REMAX DFW Associates, agreed: “For HOAs, I think the biggest issue is the need for more money. That could mean higher HOA dues and special assessments, especially for older buildings that have been keeping reserves low.”
Not all downside
Despite the furor over the reserve increase and Limited Review elimination, some of the changes are viewed positively.
For example, new and established condo projects with 10 or fewer units are eligible to forego the Full Review; projects in this cohort that have five to 10 units may not be part of a larger development or master association to qualify for the Full Review waiver, however.
The GSEs also eliminated the previous cap that prevented investors from owning more than 50% of established projects that are now slated for Full Review. By opening the door to increased investor ownership, it increases demand and value, NAR noted, but cautioned that it could also create additional competition for owner-occupants.
“There are positives,” Olsher said. “Removing the 50% investor-concentration limit for established projects and expanding waivers for smaller projects should make financing easier in some communities. …They’re loosening rules that don’t necessarily tell you whether a building is financially sound while tightening the ones that are intended to answer that question.”
Buy-side impact
The biggest change condo-shoppers and their agents will experience will be on the financing side, which will need to be discussed much earlier in the homebuying process. The agent will now need to look at more than just the buyer’s income, credit and down payment. They’ll have to look at the property’s condition: finances, reserves, insurance, repairs and other risks.
In other words, lenders will now be underwriting both borrower and building.