Buyers beware: Starting on Monday, new rules from Fannie Mae and Freddie Mac go into effect that could make it trickier to obtain a mortgage for a condo.
The new policies, announced by the two government-sponsored enterprises (GSEs) in March, could add some complexity to the sales process, as condo associations will face new scrutiny as part of the loan approval process. While the goal is to better identify condominium buildings that may pose financial or structural risks to buyers, the new lending policies could add pressure to an already-challenged area of the housing market in many cities.
Condo underwriting requirements have been a particular focus for state and federal policymakers in the five years since a 12-story condo building in Surfside, Florida, partially collapsed and 98 people were killed. In the wake of that 2021 disaster, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.) determined that they would no longer purchase or guarantee projects with significant deferred maintenance, critical repairs, or certain special assessments. Combined, the two GSEs buy about 70% of home loans that lenders originate, according to figures from the National Association of Realtors.
Among the most notable changes that take effect on Monday is that a streamlined “limited review” process has been eliminated—which means that unless a condo project qualifies for a waiver, lenders must do a more thorough review of the condo association’s finances, reserves, and insurance coverage, as well as of the condition of the building, before the mortgage can be sold to Fannie Mae or Freddie Mac. Then, beginning in January, condo associations seeking Fannie or Freddie financing will need at least 15% of their annual budget in reserve funds for major repairs and replacements, up from the current 10% requirement.
But the changes also reduce some red tape for smaller condominium projects by eliminating a prior rule that had a 50% cap on investor or nonowner-occupied units. They also eased some of the rules related to the master property insurance policy coverage and provided more flexibility for how buildings insure their roofs.
Here’s how the National Association of Realtors summed up the updates: “Overall, the changes improve financing flexibility for small projects but increase documentation and compliance burdens for others.”
TRADE GROUPS PUSH BACK
Even before they took effect, everyone from lenders to real estate agents to condo boards has been scrambling to get up to speed about how the underwriting process must adapt to the significant changes. Some housing trade groups have argued that these changes could either delay loan approval or result in more denials for condo mortgage applications.
After the March announcement, Dawn Bauman, CEO of the Community Association Institute, cautioned that the changes will “increase the administrative burden” on associations as more documentation and formal lender questionnaires will be required for nearly all condo sales. “These changes shift greater responsibility to lenders and associations to demonstrate that condominium projects are financially sound, based on Fannie Mae and Freddie Mac guidelines,” she wrote in a blog post.
Bauman told CNBC on Monday that eliminating the limited review process alone could lengthen the loan approval process and that cash buyers could have an advantage in the future because they would be able to finalize a transaction much more quickly.
Max Slyusarchuk, CEO of AD Mortgage in Fort Lauderdale, Florida, also cautioned that the application process could take longer and result in more disqualified applicants. Buyers “should expect it to be way more difficult to buy a condominium,” he told CNBC.
That said, many of those delays may happen early on, a spokesperson for the Mortgage Bankers Association told the outlet. Once a lender successfully completes a full review of a condo project, another full review generally won’t be required for subsequent mortgages in the building. “It is not needed for every loan.”
HOPE ON DELAYING FINANCING REQUIREMENTS
Although appeals to modify or postpone the changes that take effect Monday didn’t get any traction with the Federal Housing Finance Agency, some trade groups are hoping to delay the association financing requirements that are scheduled to take effect on January 4, 2027.
In July, the Community Association Institute, Community Home Lenders of America, and the National Association of Mortgage Brokers sent a letter urging that the Federal Housing Finance Agency delay the new financing requirements by at least one year. The groups warned that, without revision, the announced policy changes “could unintentionally increase costs for homeowners, reduce financing availability, and create unnecessary barriers for buyers and lenders.”
Because condo associations aren’t experts in Fannie Mae or Freddie Mac lender requirements, Bauman told CNBC that compliance could vary. “We’re really encouraging a delay to that requirement for another year to give these boards and managers the opportunity to understand the changes in place.”