Condo buyers face new mortgage rules under Fannie Mae, Freddie Mac

Prospective homebuyers eyeing a condominium may soon discover that mortgage lenders are as interested in the condo building as they are in the buyer.

New condo-lending policies taking effect on Aug. 3 from Fannie Mae and Freddie Mac — government-sponsored enterprises that purchase qualifying mortgages on the secondary market — mean that some purchases could involve greater scrutiny by lenders. While lenders already review condo associations in many cases, the new policies require a closer look at the association’s finances, reserve funding and building maintenance for some transactions.

The changes are intended to better identify condo buildings with financial or structural problems and reduce the risk that owners face unexpected special assessments or higher association dues, according to a March 18 letter to lenders from Fannie Mae. 

However, some trade groups and loan experts say the change is likely to cause delays in mortgage approvals, and in some cases, lead to mortgage denials if a condo building fails to meet the new standards. 

“It will make the [application] process take much longer and will result in a lot of disqualifying applications,” said Max Slyusarchuk, CEO of AD Mortgage in Fort Lauderdale, Florida. The mortgage wholesaler sent a letter dated July 16 to the Federal Housing Finance Agency, which oversees Fannie and Freddie, urging the agency to modify or postpone the changes.

Buyers “should expect it to be way more difficult to buy a condominium,” Slyusarchuk said.

FHFA did not respond to an email seeking comment.

Fannie and Freddie buy home loans from lenders and package them into mortgage-backed securities for investors. If lenders want to sell mortgages to Fannie or Freddie — and most do because it frees up capital to do more lending — the loans must meet certain underwriting standards, whether for a condo or other type of home.

Buying a condo is generally less expensive than purchasing a single-family home. The median price for a condo or co-op was $380,000 in June, up 1.6% from a year earlier, according to the National Association of Realtors. That compares with a median price of $446,400 for a single-family home.

As of 2023, there were about 8.6 million condominium units in the U.S. overall, according to the Census Bureau’s American Housing Survey.

Since the partial collapse of the 12-story Champlain Towers South condo building in Surfside, Florida, on June 24, 2021, which killed 98 people, lawmakers and policymakers have continued to tighten standards affecting condo purchases and financing.

The National Institute of Standards and Technology, a government agency within the Commerce Department charged with investigating major building failures, released a report on June 22 concluding that the 40-year-old building had design and construction flaws from the time it was built, as well as decades of deterioration that contributed to the collapse. Published reports in the aftermath of the collapse showed that the condo association had delayed major repair work as the cost and scope of the project were debated.

The disaster prompted the Florida state legislature to enact condo reforms, including special inspections for older buildings, as well as requirements to address identified structural problems and adequately fund reserves for future repairs.

Nationally, Fannie Mae and Freddie Mac tightened condo underwriting in the months after the Surfside collapse by making projects with significant deferred maintenance, critical repairs or certain special assessments ineligible for mortgages they would purchase or guarantee. The changes, initially implemented as temporary measures, were largely made permanent in 2023. 

This year, in March, Fannie and Freddie unveiled additional changes. Some, such as allowing condo associations more flexibility in how they insure roofs, are intended to help reduce costs and expand access to insurance coverage for associations.

Others are designed to reduce risk for homebuyers and lenders. Beginning Aug. 3, one of those changes eliminates the limited, or streamlined, review that’s been available for certain condo buildings. 

Instead, unless a project qualifies for a waiver — which can include some smaller condominium projects — many transactions will require a full review. That means lenders will do a more comprehensive assessment of the condo association’s finances, reserves, insurance coverage and the building’s condition before the mortgage can qualify for sale to Fannie or Freddie.

Roughly 40% of condominium purchases involving a mortgage have been made using a limited review and could now require a full review, a change that is likely to lengthen the loan approval process, said Dawn Bauman, CEO of the Community Associations Institute, which represents condominium, homeowners association and housing cooperative communities. 

“That is something that will require additional manual human engagement from almost all parties involved, certainly for the mortgage lender and community association,” Bauman said.

A spokesperson for the Mortgage Bankers Association said whether the mortgage application process is held up will depend on the project, the availability of required documentation and how readily this documentation can be provided. 

However, once a lender completes a full review, “the project is in the [Fannie and Freddie] systems as approved,” the MBA spokesperson said. “It is not needed for every loan.”

In other words, once a condo project has passed a full review, lenders generally won’t have to repeat it for every subsequent mortgage. 

At the same time, if a condominium project fails to meet Fannie Mae’s or Freddie Mac’s underwriting standards during a full review, the lender may deny the buyer a mortgage, Bauman said. 

“I think we’ll see some buildings that qualified under limited review become ineligible under full review because there may be a nuance they aren’t complying with,” Bauman said. “But it won’t mean the building is unsafe or structurally compromised or that the financial health of the building is in trouble.”

For buyers, a denial from one lender doesn’t necessarily mean the unit can’t be purchased. Some lenders may be willing to keep the loan in their own portfolios rather than sell it to Fannie or Freddie. 

However, it could cost you more, said Slyusarchuk. Generally speaking, if a lender is willing to do a loan that they can’t sell, they’ll mitigate their own risk by, say, requiring a higher down payment or charging a higher interest rate on the loan.

Additionally, a lag in the process could give cash buyers a leg up because they would be able to finalize a transaction much more quickly, Bauman said.

Also on the way is a policy taking effect Jan. 4 that generally will require condo associations seeking Fannie or Freddie financing to set aside at least 15% of their annual budget in reserve funds for major repairs and replacements, up from the current 10%. 

“Condo projects with inadequate reserves typically do not have the requisite resources to maintain the physical condition of the project or to fund unexpected operating expenses,” Fannie Mae’s March 18 letter to lenders reads. “As a result, unit owners can experience substantial financial hardship from unexpected special assessments or higher regular assessments or dues, leading to mortgage default or foreclosure.”

Bauman’s group, along with Community Home Lenders of America and the National Association of Mortgage Brokers, sent a letter to the Federal Housing Finance Agency on July 9, asking that the new financing requirements be delayed for a year.

Condo associations “are not experts in Fannie or Freddie lender requirements. They just suddenly get a lender questionnaire, and they complete the information,” Bauman said. “There will be buildings that don’t know about that change, so they can’t comply with it. 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.”