New Condo Lending Rules: What Buyers, Sellers and HOA Communities Need to Know

Financing a condominium is changing again—and buyers, sellers and condo associations need to pay attention.

In March, Fannie Mae and Freddie Mac announced updates to the condo lending standards that were strengthened following the Surfside condominium collapse in 2021 and revised again in 2023. Some of the most significant changes took effect on August 3, despite concerns raised by several real estate and lending industry groups.

Fannie Mae stated that the updated guidelines are intended to give lenders and loan servicers more flexibility, make the review process more consistent, confirm that condominium communities have adequate insurance and improve the long-term financial stability of condo associations.

As Rate Mortgage President Shant Banosian explained:

“Simply put, condo deals that worked in the past don’t work anymore. 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.”

That last point is important. A buyer may have excellent credit, sufficient income and a substantial down payment—and still be unable to obtain financing because of issues involving the condominium community itself.

Concerns from the real estate and lending industries

Several industry organizations have argued that portions of the new requirements are too expensive, overly burdensome and being implemented too quickly.

In a July 9 letter to Federal Housing Finance Agency Director Bill Pulte, the Community Home Lenders of America, Community Associations Institute and National Association of Mortgage Brokers warned that the changes could increase costs for borrowers and current condo owners. They also expressed concern that the new requirements could cause some lenders to stop financing condominiums or reduce the availability of condo loans.

The organizations requested that the changes be delayed or modified.

Limited Review has been eliminated

One of the biggest changes is the elimination of Fannie Mae and Freddie Mac’s Limited Review process.

Previously, certain qualifying condo purchases could receive a more streamlined review that required less documentation about the association and the overall community. As of August 3, most condominium projects must complete the more detailed Full Review process.

This means lenders will take a closer look at items such as:

• The association’s annual budget
• Reserve funding
• Insurance coverage
• Pending or completed repairs
• Special assessments
• The physical condition of the property
• HOA financial and governing documents

Industry groups have criticized the new approach because it applies similar standards to very different types of condominium communities. An older oceanfront high-rise, for example, may present substantially different risks than a small garden-style condominium located in another part of the country.

Jeremy Olsher, broker associate and principal of Mizner Residential Group at Compass in Boca Raton, described the practical effect:

“Eliminating Limited Review means more condo transactions will require a deeper look at the HOA, its reserves and its documentation. 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.”

For sellers, this means the condition of the HOA’s records and finances can directly affect the number of buyers who are able to purchase a unit in the community.

Reserve requirements are increasing

Another significant change involves the amount of money condominium associations are expected to place into reserves.

For projects undergoing Full Review, the required reserve contribution will increase from 10% to 15% of the association’s annual budget. This requirement is scheduled to take effect January 1, 2027.

Banosian explained the reasoning behind the increase:

“Fannie Mae has specifically cited a correlation between underfunded reserves and projects with critical repairs. 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.”

Associations generally use reserve funds for major repairs, replacement projects and long-term capital expenses. An HOA may also use a professional reserve study to establish an appropriate funding level, although it must follow the highest estimate identified in the study.

While properly funded reserves are important, reaching the new standard could be difficult for communities that have historically kept assessments and monthly HOA fees low.

The National Association of REALTORS® called the 50% increase and the limited time allowed for associations to comply “problematic,” adding:

“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 of RE/MAX DFW Associates expressed a similar concern:

“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.”

That is a real possibility. Associations that are not currently meeting the reserve requirement may need to increase monthly HOA fees, approve a special assessment or reduce other operating expenses.

There are a few positive changes

Not every part of the updated guidelines will make condo financing more difficult.

New and established condo projects with 10 or fewer units may be able to receive a waiver from the Full Review requirement. However, communities with five to 10 units generally cannot be part of a larger development or master association if they want to qualify for that waiver.

Fannie Mae and Freddie Mac have also removed the previous limitation that generally prevented investors from owning more than 50% of the units in certain established condo communities undergoing Full Review.

Removing that restriction could make financing available in communities with substantial investor ownership. It may also increase demand and support property values, although it could create more competition between investors and buyers who plan to occupy their units.

Olsher summarized the tradeoff:

“There are positives. 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.”

What this means for condo buyers

The financial condition of the condominium community needs to be discussed much earlier in the buying process.

Getting preapproved remains important, but a buyer’s income, credit score and down payment are only part of the equation. The lender will also evaluate the condominium association’s finances, reserves, insurance, maintenance history and any major repair or structural concerns.

Before moving forward with a condo purchase, buyers and their agents may need to ask:

• Does the community meet the lender’s reserve requirements?
• Is the master insurance policy adequate?
• Are major repairs or special assessments pending?
• Are the association’s financial records complete and current?
• Has the project previously experienced financing problems?
• Is the lender familiar with condominium underwriting?

Waiting until the property is under contract to investigate these questions could lead to delays—or to the buyer losing financing altogether.

What this means for condo sellers

Sellers should understand that an individual unit can show beautifully and be priced correctly, but financing can still be affected by the condominium association.

Before listing, it may be helpful to determine whether the association can promptly provide its budget, insurance information, reserve documentation and details about repairs or assessments. If the community has recently encountered financing problems, that information should be addressed early rather than discovered after a contract is signed.

The bottom line is straightforward: lenders are no longer evaluating only the buyer. They are underwriting the buyer and the condominium community.

For well-managed communities with adequate reserves, proper insurance and organized records, the updated process should be manageable. For communities with underfunded reserves, incomplete documentation or unresolved repairs, selling and financing units may become more challenging—and potentially more expensive.