Fannie, Freddie condo rules tighten Aug. 3, ending limited reviews

Condo buyers face a tougher mortgage market starting Aug. 3 as Fannie Mae and Freddie Mac end limited reviews, requiring full financial and structural checks on roughly 40 percent of condo purchases.

"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 changes stem from the June 2021 collapse of Champlain Towers South in Surfside, Florida, which killed 98 people. Fannie and Freddie, which buy qualifying mortgages from lenders and package them into mortgage-backed securities, first tightened condo underwriting in the months after the disaster and made those measures largely permanent in 2023. The new rules eliminate the streamlined review that previously allowed some condo projects to qualify with less scrutiny.

The median condo or co-op price was $380,000 in June, up 1.6 percent from a year earlier, compared with $446,400 for a single-family home, according to the National Association of Realtors. With about 8.6 million condo units in the U.S. as of 2023, per the Census Bureau's American Housing Survey, the policy shift could affect a large share of the housing market.

Full reviews replace streamlined checks

Under the new rules, unless a condo project qualifies for a waiver — which can include some smaller developments — lenders must conduct a full assessment of the association's finances, reserves, insurance coverage and building condition before the mortgage can be sold to Fannie or Freddie. Roughly 40 percent of condo purchases involving a mortgage previously used the limited review, said Dawn Bauman, CEO of the Community Associations Institute, which represents condo, 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.

Once a lender completes a full review, the project is logged in Fannie and Freddie's systems as approved, a spokesperson for the Mortgage Bankers Association said, meaning subsequent loans on the same building won't require a repeat review. But if a project fails to meet underwriting standards, 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."

A denial from one lender doesn't necessarily end the purchase. Some lenders may keep the loan in their own portfolios rather than sell it to Fannie or Freddie, though that typically comes at a cost. "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," Slyusarchuk said. The added friction could also give cash buyers an advantage because they can close without mortgage financing, Bauman noted.

Reserve funding requirement rises to 15 percent

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

"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."

The Florida legislature enacted its own condo reforms after the Surfside collapse, including special inspections for older buildings and requirements to address structural problems and fund reserves. The national rules from Fannie and Freddie extend similar scrutiny to condo projects across the country.

Trade groups including the Community Associations Institute, 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 for a one-year delay on the new financing requirements. AD Mortgage separately urged the agency to modify or postpone the changes in a July 16 letter. FHFA did not respond to a request for comment.

"Condo associations are not experts in Fannie or Freddie lender requirements," Bauman said. "There will be buildings that don't know about that change, so they can't comply with it."

For prospective condo buyers, the practical takeaway is to verify a building's compliance status before making an offer. Buyers should ask whether the condo association has adequate reserves, current insurance and no significant deferred maintenance, since these factors now determine whether a mortgage can be approved. The rules apply to loans sold to Fannie and Freddie, which covers most conforming mortgages in the U.S. market. Buyers should also confirm the latest policy details with their lender, as rules and timelines may be updated by the Federal Housing Finance Agency.

This article is for informational purposes only and does not constitute investment advice.