Fannie and Freddie’s New Condo Mortgage Rules Could Mean More Delays and Denials, Experts Say

Fannie Mae and Freddie Mac are rolling out a new set of rules aimed at making condos safer. But they come with some extra caveats that would-be condo owners ought to know.

This week, the Federal Housing Finance Agency enacted a set of rules announced in March that change insurance requirements for condominium buildings and communities. The new rules require more thorough reviews of a condo association's finances, as well as the building's condition.

The new rules also mandate that condo associations carry more reserves for maintenance.

FHFA Director William Pulte said the goal was to reduce insurance and other costs, and give buyers "confidence that they can afford the American dream."

But Realtor.com® senior economist Joel Berner says the changes also mean it might take a little longer to obtain a mortgage, and there is a risk of higher denial rates.

"Where before, purchases were authorized with limited review of a condo association's budget, reserves, insurance, and litigation history. Now, under the required full review, more issues will crop up causing delays and denials," Berner says.

"Condo associations and lenders are not used to being required to provide all this paperwork," he adds.

Changes in store

Condo maintenance has come under tighter scrutiny after the 2021 condominium collapse in Surfside, FL, that killed 98 people. It triggered a series of changes to condominium laws in that state, which led to skyrocketing HOA fees.

So, some of the new rules aim to make condos safer. Those changes also make lending more onerous.

As of Aug. 3, new rules eliminate faster "limited" condo reviews—a process previously used for up to 40% of loans, in favor of the standard full reviews.

Limited and full reviews share many of the same key project eligibility requirements, including requirements related to property insurance and litigation. But a full review also requires lenders to assess the project’s financial position, including its budgeted reserves and owner dues delinquencies.

That changes a few key things. Under a limited review, lenders had to determine that the project did not have critical repair needs, and that requirement has not changed. But the added financial review entails more documentation requirements, such as a project's budget.

Another new rule, which takes effect in January, raises the amount that condo associations must save and spend on maintenance. Lenders must generally confirm that a condo association’s annual budget allocates at least 15% of its annual assessment income to reserves for future maintenance and repairs, rather than 10%.

That's put some owners in a position where they suddenly had to pay more in dues for their association to build its reserves. HOA foreclosures spiked nearly 40% in two years, to 6,376 properties in the first quarter, the Wall Street Journal reported.

In March, Mortgage Bankers Association CEO Bob Broeksmit said change is due for the "overly rigid requirements." He estimates tens of thousands of units could be eligible for lower-cost financing from government-sponsored enterprises like Fannie Mae and Freddie Mac

But even groups that agree with stronger guardrails for condo buyers caution the process will be more complicated.

Dawn Bauman, CEO of the Community Associations Institute, worried that some condos that passed limited reviews might be denied during full reviews.

Bauman also disputed FHFA's claims that full reviews will make condo ownership more attainable.

"There is no indication that the limited review is leading to more delinquencies or poorer performance of the portfolio that the GSE carries," Bauman said. "It seems to be about a data collection initiative rather than risk management."

For condo buyers, Berner says it's important to recognize that these rules changes might mean it takes a little longer to close than it might have before. And it also means they may face higher condo fees.

"To smooth the process as much as possible, they should ask for the HOA's reserve study, budget, and insurance certificate as early as possible in the process rather than waiting for underwriting to request it, since a building that fails review can kill the deal late," Berner says.

"Buildings that fail their full review or lose warrantability not only complicate the current purchase, but also limit the buyer's ability to resell the condo in the future," he continues. "It's extremely important to purchase in a building that 'plays ball.'"