The Gses Updated Their Rules For Condo Loans. Will They Be Helpful Or Harmful?

Fannie Mae and Freddie Mac last week enacted updates to condominium project standards and property insurance rules for one- to four-unit properties and larger developments, aiming to lower costs for homeowners. The moves have been met with mixed opinions from mortgage professionals.

The updates, which Fannie Mae and Freddie Mac announced on March 18, allow greater leeway in how replacement cost coverage is calculated, including permitting cash value coverage on roofs and adjusting deductible limits. These steps are expected to ease insurance costs that have increasingly constrained condo financing.

At the same time, the government-sponsored enterprises (GSEs) will eliminate limited and streamlined review options for condo loans starting Aug. 3, requiring full project reviews in all cases. The shift is expected to increase documentation requests to homeowners associations (HOAs) and raise origination costs, particularly for lenders that relied on the abbreviated review process to expedite approvals.

The changes also strengthen financial requirements for condominium associations, raising minimum reserve funding thresholds from 10% to 15% of annual budgeted income by 2027.

While higher reserves may improve long-term stability and reduce the risk of special assessments, industry participants say the stricter standards could increase monthly dues and make it more difficult for some borrowers and projects to qualify.

“It is going to make it harder for condo associations to qualify, or they’re going to have to really take a review of their current budgets right now and what they have coming up, and if they have enough in their reserves, and if their condo fees are enough,” Keely Maguire, a senior loan originator at Novus Home Mortgage, told HousingWire.

As a result, Maguire says many condo associations have not maintained adequate reserves for special assessments, leaving them without the funds needed to complete necessary projects or cover rising insurance costs.

“They’re likely not going to qualify in the conventional bucket, because they won’t have enough assets or reserve in their budget. I have a feeling that we’re going to be seeing a rise in doing non-QM condos because of this,” she said.

Weighing the pros and cons

Maguire says the changes, while they protect mortgages and consumers, could backfire. “With these new requirements, you’re going to see a lot of condo associations that aren’t going to meet them, or are going to have to change things up to meet them or raise their HOA dues.”

One good thing that came out of the changes, Maguire added, is that the GSEs are doing away with the rule that no more than 50% of units can be owned by real estate investors. “That’s a good change for investors, but that doesn’t help the person trying to buy a condo as a first-time homeowner, or someone who’s trying to downsize, or anyone who’s looking for it to be a main residence,” she said.

In a letter to the Federal Housing Finance Agency (FHFA) regarding the changes, the National Association of Mortgage Brokers (NAMB) commended the agency for addressing rising insurance costs and modernizing condo review standards, but the trade group also flagged changes that could limit access for first-time buyers.

Specifically, NAMB expressed concern over the elimination of the limited review process for established condo projects.

“The limited review process has been essential in enabling efficient and scalable lending in established condominium communities,” NAMB President Kimber White said in a statement. “Its removal risks disqualifying otherwise sound properties due to documentation challenges rather than actual risk.”

In its letter, NAMB recommended keeping a limited review option for lower-risk projects, giving lenders clear guidance, assessing impacts on first-time buyers, and quickly implementing supported provisions like flexible insurance and streamlined rules for smaller condos.

Gino Fronti, the West Division president for Lower, holds a similar sentiment to NAMB.

“It’s a step in the right direction, but it’s not going to help all condo complexes. It’ll help certain markets, particularly in places like California and Florida, but it won’t solve all of the condo challenges we’re seeing across the country,” he told HousingWire via email.

Fronti added that condos still need flexibility around repairs and deferred maintenance.

“In states like California, balcony-related requirements are creating significant challenges where repairs haven’t been completed yet. Even in cases where associations have evaluated the work and have sufficient reserves, those projects may still struggle to qualify for financing,” he said.

But there are positives. Fronti says that the simplification of deductible structures should allow some condo projects to qualify that previously were not eligible.

“At the same time, the added reserve requirements make it clear there is still a strong focus on mitigating risk tied to special assessments. That’ll require a level of fiscal discipline from condo associations that hasn’t always been in place.”