Not so very long ago when people decided they were ready to become homeowners, most didn’t even think to consider a condo. The American Dream was a standalone house. It still is, but with limited inventory in many places and elevated mortgage rates and prices, suddenly a less expensive condo is more logical and achievable for many.
Buying a condo, however, can have a more complex set of variables when it comes to financing. A bank that offers mortgages will simply have the property appraised. Condos are units in a building or development that can be small or large, and it is their overall fiscal viability that is judged.
To qualify for standard conventional or federal mortgage loans (such as Fannie Mae, Freddie Mac or FHA), condo associations must currently allocate at least 10% of their annual operating budget to replacement reserves. Fannie Mae and Freddie Mac have announced an increase to 15% effective for loan applications starting January 4, 2027, unless fully funded via a professional reserve study.
In a recent National Association of Realtors webinar, Rob Harrington, chair of NAR’s Conventional Financing and Policy Committee, discussed these changes with Jodi Horne, Fannie Mae’s director of collateral risk management, particularly in response to aging buildings, underfunded associations and lessons learned since Miami’s Surfside condo tragedy in 2021. In the Q&A below, Horne refers to a condo complex as a project.
Rob Harrington: Some Realtors are hearing that every time a unit will transact now it needs a full Fannie Mae review. Can you clarify what the policy is on that?
Jodi Horne: Not every project will require a full review. Again, if Fannie Mae has reviewed that project and we have an approval on it, then lenders may use that for as many loans as they need to put through under that project. We don’t have any limitations. Unlike FHA, for example, which may have a concentration cap. When Fannie Mae approves a project, we approve it for a certain time period. And unless information comes to light that might suggest circumstances have changed, the review is good for up to three years. So that’s quite some time.
When the lender does a full review, that review sits with that lender. So it’s not available for all lenders in the industry, but they’ll do their own project review for that project. On an established project, that full review is good for a year. Lenders that do a lot of business in a project will typically do a review once a year, and then will originate loans off of that one review for that year. When that review expires, they can simply update the information that changes. There are a couple of things that change on a regular basis, and then they can refresh that review and be originating again.
RH: After the Surfside disaster there were a lot of significant changes from Fannie Mae. Now five years later we’re seeing another big group that was announced in March and implemented over the course of this year. Talk about how those initial changes went and why this round of changes fit into the big picture.
JH: A lot of this is about sustainability and affordability. Even before Surfside, we were looking at some of these questions because we were starting to see that there were a lot of projects around the country that were really struggling to maintain their physical assets. Buildings were aging. There was no money in the bank to do the repairs needed. Many were falling into disrepair. Some were even choosing to sell off what remained of those assets in order to avoid large special assessments the owners could not afford.
We saw again and again that a project needing critical repairs simply did not have enough in reserve to be able to address those repairs when they needed to be done. Then they would stack up. Anytime you neglect regular routine maintenance, things start to get worse. The cost of doing the repair goes up. It becomes a downward spiral.
RH: The elephant in the room for most Realtors is reserves. Was it 10% now going to 15%? The associations have to be showing that by January, I think January 4th, a 50% increase. Was 10% just not enough? Some people think it has to do with the 15% that has to be funded and in the bank. And others are just saying potentially they just have to start budgeting at 15%. Can you kind of demystify this?
JH: This is not a money in the bank policy requirement, but how is the project budgeting? What is their plan? Are they planning to set aside enough money? Are they budgeting to reserve at least 10% of their regular assessment income for capital improvements and replacement reserves? So the lender is not asking to see a financial account statement. They’re not asking to see account balances. They are looking at the budget and they’re comparing the amount of the reserves listed on that budget for the coming year against the annual assessment income. And that does not need to include special assessment income or other kinds of income. It’s really looking at the dues, the regular dues that the homeowners are paying. Today it is 10%, but on January 4th with new loan applications, that increases to 15%. One of the reasons we made that change is that what we were seeing is that by and large across the country most projects were not reserving enough.
RH: Housing is already crazy expensive. Affordability thresholds are getting higher and higher. Any considerations for people who might not be able to afford it, or a complex with seniors?
JH: Affordability is the first thing we think about for any of this, but we might think about it a little bit differently. It’s one thing to be able to buy a condo and afford the mortgage from a qualifying perspective. But it’s another thing entirely to be able to afford staying in the unit over the long run. And one of the things that we often see is that homeowners buy into projects that may be underfunded and suddenly there’s a sharp increase in assessments or even a special assessment. And it’s no longer an affordable home ownership path for them. So we think about affordability in two places. The first is can they afford the mortgage payment now? And then are they likely to be able to afford their obligations to the HOA in the future?
RH: What can Realtors do in this process to help buyers and sellers and the associations avoid last minute surprises when there’s a condo review going on?
JH: If you are helping a homeowner sell their unit in a condo project, there are a couple of things that you can do right away. Number one, have them work with their lender to understand if the condo project is ineligible already. Or you can have the HOA go directly to Fannie Mae through our condo status finder and we’ll provide you that information. We will tell you or tell the HOA whether or not the project is ineligible. And if it is ineligible, we’ll let you know what we have on file, the information that is needed to correct that. The HOA can work directly with Fannie Mae to make those corrections. So there’s no need to wait until you get two or three months down the road and a buyer on the hook and all of that kind of stuff. You can do that in advance when you’re starting to go through the process of listing the condo unit.
RH: Is there anything Realtors could do to work with HOAs to be proactive and maybe get reviews done in advance even when there might not be a loan currently in process on their complex?
JH: We currently don’t have a process to take that sort of thing in from a Realtor or an HOA. We do have what’s called the Fannie Mae Project Eligibility Review Service, where a lender can submit a project to Fannie Mae for underwriting review. It is a fee-based service and it has about a two-week turn time. The fee can range anywhere from $500 to $2,000. But certainly if the Realtor can work to get the information in the hands of the lender, I’m sure the lender will want to do that review and be able to do the loan. It may take some time and talking with the HOA or the management company to help them understand how important it is. We’ve been doing a lot of outreach at Fannie Mae with HOAs, and it’s clear some of them simply don’t know that this is part of the input to the mortgage process, and their action or inaction might hinder the ability of someone to sell their unit or a new owner to buy into their project. If they simply understood that, they might put a different urgency on getting that information in the hands of the lenders.
