Condo mortgage rules tighten as Fannie and Freddie expand reviews

Condo mortgage rules are about to get stricter for many buyers, which could make a purchase take longer or become harder to finance. Beginning Aug. 3, Fannie Mae and Freddie Mac will require fuller reviews of many condominium projects before lenders can sell those mortgages to the two government-sponsored enterprises.

That matters because Fannie and Freddie buy qualifying mortgages from lenders, helping lenders free up money to make new loans. If a condo loan does not meet their standards, a lender may be less willing to approve it, or may offer different terms if it keeps the loan on its own books.

How will condo mortgage rules change?

The biggest near-term change is the removal of the “limited review” process for many condo transactions. A limited review is a streamlined check that lets some loans move through with less project-level scrutiny. Under the new policy, many of those loans will instead need a full review unless the building qualifies for a waiver, such as some smaller condominium projects.

A full review means lenders will look more closely at the condo association’s finances, reserve funds, insurance coverage and building condition. Fannie Mae said in a March 18 lender letter that the goal is to better spot projects with financial or structural problems and reduce the chance that owners later face surprise special assessments or higher dues.

Freddie Mac announced related changes in March as well. Some updates are meant to give associations more flexibility on insurance, including roof coverage, while others are aimed at reducing risk for buyers and lenders.

Why lenders are looking harder at condo buildings

The stricter review environment follows years of concern about aging condo buildings after the June 24, 2021, partial collapse of Champlain Towers South in Surfside, Florida, which killed 98 people. The National Institute of Standards and Technology said in a June 22 report that the 40-year-old building had design and construction flaws from the start, along with decades of deterioration that contributed to the disaster.

After Surfside, Fannie Mae and Freddie Mac made condo projects with significant deferred maintenance, critical repairs or some special assessments ineligible for loans they would buy or guarantee. Those rules began as temporary measures and were largely made permanent in 2023.

Condos remain a key entry point for many buyers because they tend to cost less than single-family homes. The National Association of Realtors said the median condo or co-op sold for $380,000 in June, up 1.6% from a year earlier, compared with $446,400 for a single-family home. The Census Bureau’s American Housing Survey counted about 8.6 million U.S. condominium units as of 2023.

Could condo buyers face delays or denials?

Industry groups expect some friction. Dawn Bauman, CEO of the Community Associations Institute, said about 40% of condo purchases using a mortgage have relied on limited reviews and could now need full reviews. She said the process will require more manual work from lenders and associations.

A Mortgage Bankers Association spokesperson said any delay will depend on the project and how quickly required documents are available. Once a project receives full-review approval in Fannie and Freddie systems, the spokesperson said, that review generally does not need to be repeated for every loan.

Some applications could still be rejected if a project fails Fannie or Freddie standards. Bauman said some buildings that passed under limited review may not qualify under full review because of technical noncompliance, even if the building is not unsafe or financially distressed.

Max Slyusarchuk, CEO of AD Mortgage in Fort Lauderdale, Florida, told CNBC the process could take much longer and lead to more disqualified applications. His company sent a July 16 letter to the Federal Housing Finance Agency, which oversees Fannie and Freddie, asking for the changes to be modified or delayed. CNBC reported the FHFA did not respond to a request for comment.

A second change arrives Jan. 4: condo associations generally will need to set aside at least 15% of their annual budget for reserves tied to major repairs and replacements, up from 10%. The Community Associations Institute, Community Home Lenders of America and the National Association of Mortgage Brokers asked the FHFA on July 9 to delay the financing requirements for one year.

This story draws on original reporting from CNBC.