New Condo Lending Rules Could Slow Mortgage Approvals, Raise Borrowing Hurdles

Buying a condominium with a mortgage may become more difficult under new lending standards that took effect this week for loans backed by Fannie Mae and Freddie Mac.

The new policies require lenders to conduct more comprehensive reviews of many condominium associations, including their finances, reserve funding, insurance coverage and building maintenance, before mortgages can qualify for purchase by Fannie Mae or Freddie Mac.

The changes are intended to identify buildings with financial or structural concerns and reduce the risk of unexpected special assessments or sharply higher association fees for homeowners.

Industry groups and mortgage professionals said the new standards could delay loan approvals and, in some cases, result in mortgage denials if condominium projects fail to meet underwriting requirements. Beginning Aug. 3, many transactions that previously qualified for a streamlined review now require a full evaluation of the association's financial health and the condition of the building.

The Community Associations Institute estimates roughly 40% of condominium purchases involving a mortgage had been processed under the limited review process that has now been eliminated, potentially lengthening closing times.

The stricter standards follow the 2021 collapse of the Champlain Towers South building in Surfside, Florida, which killed 98 people and prompted changes to condo financing and inspection requirements nationwide.

Beginning next year, most condominium associations seeking financing through Fannie Mae or Freddie Mac also will generally be required to reserve at least 15% of their annual budgets for major repairs, up from the current 10% requirement.