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Fannie and Freddie Tighten Condo Lending Rules. What Buyers Need to Know
0 Share Newsweek is a Trust Project member See more of our trusted coverage when you search. Prefer Newsweek on Google to see more of our trusted coverage when you search. Americans thinking of buying a condominium might soon face significant delays and more frequent denials as a result of new lending rules introduced by mortgage giants Fannie Mae and Freddie Mac to make buildings safer.
The two companies, which guarantee most of the mortgages made in the U.S., announced the changes in March to help identify condo buildings with financial or structural problems, reduce the risk faced by owners, and thus protect themselves from default risk on condo mortgages.
"Condo building collapses, such as the one that occurred in Surfside, Florida, in 2021 , and huge special assessments levied against condo owners to prevent such catastrophes do not lead to reliable payments from condo owners," Joel Berner, senior economist at Realtor.com, told Newsweek .
"As such, the GSEs [government-sponsored enterprises] are demanding more due diligence at the time of purchase to avoid these financial risks."
But some experts are concerned that these new rules might do more damage than good to condo buyers across the country.
Fannie and Freddie’s new condo-lending policies took effect on August 3, forcing lenders to scrutinize some purchases a little more closely, paying more attention to condo associations’ finances, reserve funding and building maintenance for some transactions.
Fannie and Freddie are also ending the use of a funding method that allowed reserve balances to get very close to zero.
Condo associations must also save more money for repairs. Previously they typically had to dedicate at least 10 percent of their annual budget to reserves for future repairs and maintenance; Fannie and Freddie have raised that requirement to 15 percent.
The so-called "limited review" shortcut, a simplified review process which many established condo projects could previously qualify for, has been eliminated. Most condos will now need a more detailed "full review," unless they qualify for a waiver.
The two mortgage giants have acknowledged that this might make things more difficult for many condo buyers and owners already struggling with rising costs , but maintained that these changes are necessary.
"We recognize that in certain areas, rising premiums and limited insurance availability are creating challenges for borrowers and homeowners’ associations. At the same time, we remain focused on mitigating risks of inadequate protection against property loss, including underinsurance and underfunded condo projects," Fannie Mae wrote in a March letter announcing the new policies.
Experts have been voicing their concerns about the impact of the new rules on the condo-lending market.
The new rules, which can lead to entire condo buildings being deemed unwarrantable, will result "in slower and more document-heavy approvals for conventional mortgages and higher HOA [homeowners' association] fees for condo associations to meet reserve requirements," Berner said.
This, in turn, "will result in longer application times and higher denial rates, as well as plenty of uncertainty in the condo resale market due to financing becoming less of a sure bet," he added.
Falen Pitts, director of Public Affairs at the Mortgage Bankers Association (MBA), agrees that processing times may be longer during the transition "because ‘full review’ generally requires more project-level documentation than ‘limited review’," he told Newsweek .
"The magnitude of that impact will likely vary depending on the project, the availability of required documentation, and how readily homeowners’ associations and property management companies can provide it," Pitts said.
"It is also important to note that once a lender completes a ‘full review,’ the project is in the GSEs’ systems as approved. It is not needed for every loan."
Overall, the new rules could be worth the pain they are likely to cause buyers "if it leads condos to handle maintenance more proactively and avoid major issues and special assessments," Berner said.
"Think ‘a little pain at purchase to avoid major pain later on’."
It could all be for nothing, however, "because it adds to the current affordability crisis at an inopportune time, when buyers are spread thin and the condo market is sluggish already," Berner said.
"Condos have long represented an important entry-level access point for homeownership, but these rules make condo purchases more difficult."
Despite his skepticism, Berner still believes that "Americans are probably better off in the long run because of these rules preventing them from getting into poorly-maintained and financed condos, but there are plenty of issues in the short run."
If you’re buying, you should make sure you have the budget for a slower, more paperwork-heavy process, "and ask specifically about the building’s reserve funding percentage and whether it’s passed ‘full review’," Berner said, “—don't assume a high down payment protects you from scrutiny anymore."
If you already own a condo, your dues are likely going up, possibly substantially, as your association scrambles to hit the 15 percent threshold by the January 2027 deadline, according to Berner.
If you are selling a condo, you should know that "a building that hasn’t gotten ahead of these requirements could become harder to sell to conventional buyers, which is a real property-value risk worth flagging to owners now, not after they list," Berner said.
Contact Newsweek editors for this story: Matthew Robinson and Robert Greenall
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