New rules may complicate condo mortgages

New lending policies affecting condominium mortgages tied to Fannie Mae and Freddie Mac are scheduled to begin taking effect on August 3. The changes shift more attention from individual borrowers to the financial and physical condition of the condo buildings in which they are buying. Lenders selling mortgages to the two government-sponsored enterprises will need to apply closer scrutiny to certain condominium projects before loans can be approved and sold.

While lenders already review condo associations in many cases, the updated standards will require a more detailed look at association finances, reserve funding and building maintenance for some transactions. The goal is to better identify projects with financial or structural problems and to reduce risks borne by unit owners and the broader mortgage market.

A key effect of the new framework is that many transactions that previously qualified for a limited review may now require a full review of the condo association. Roughly 40% of condominium purchases involving a mortgage have used a limited review in recent years and could be pushed into the more demanding process.

A full review requires lenders to collect and analyze more documentation, including detailed budgets, reserve allocations, insurance coverage and information on building condition. Industry participants expect this additional work to increase manual processing for lenders and condo associations and to lengthen loan approval timelines for buyers.

Once a project successfully completes a full review, it is entered into the systems used by Fannie Mae and Freddie Mac as an approved project. Future mortgages in that building generally will not need the same level of review, which may streamline later transactions. However, buildings that do not meet the updated criteria can be deemed ineligible, leading to loan denials for prospective buyers seeking these types of mortgages.

A separate policy taking effect on January 4 will change how much money condo associations generally must set aside in reserve funds to qualify for financing backed by Fannie Mae or Freddie Mac. Associations will be expected to allocate at least 15% of their annual budget to reserves for major repairs and replacements, compared with the current 10% requirement.

This higher reserve threshold is intended to ensure that buildings have more funding available for capital projects and to address structural issues when they arise. Projects that do not meet the new reserve standard may find it harder for their units to qualify for mortgages intended for sale to the two agencies.

Trade groups representing community associations, mortgage lenders and brokers have raised concerns about the timing and impact of the changes. The Community Associations Institute, Community Home Lenders of America and the National Association of Mortgage Brokers sent a letter on July 9 to the Federal Housing Finance Agency requesting a one-year delay in implementing the new requirements.

Separately, mortgage wholesaler AD Mortgage sent a letter dated July 16 urging the agency to modify or postpone the policies. Industry leaders warn that the added scrutiny will require more manual work, slow down approvals and could result in more applications being disqualified. They caution that buyers should be prepared for a more difficult and time-consuming process when purchasing a condominium with a mortgage tied to Fannie Mae or Freddie Mac.

The FHFA has not publicly responded to these requests for delay or modification. Until any changes are announced, lenders and condo associations are preparing for the new standards, and prospective buyers may face longer timelines and tighter eligibility when seeking financing in affected condominium projects.