Condominium buyers using a mortgage to finance their purchase may need to consider some rule changes to the lending process that took effect last week.
Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase and guarantee conventional conforming loans, announced earlier this year that they’d eliminate a streamlined “limited review” process that lenders could use to bypass a longer “full review” of a condo’s homeowners association or property management company.
Low-risk mortgage borrowers could once qualify for a limited review as long as they put 10% to 25% down, depending on the occupancy type — such as primary residence, second home or investment property. As of Aug. 3, regardless of the buyer’s down payment amount, all condos with more than 10 units are now subject to a complete financial review when a borrower applies for mortgage financing through a conventional loan.
If you’re planning on buying a condo this year, it’s important to understand how this new requirement will impact your home search and the financing process.
Elimination of Limited Reviews May Cause Delays, Disqualify Condos
By requiring a full review for all condo projects, the GSEs are tightening standards and shifting financial responsibility from an individual owner to the building’s management. For buyers, this could mean better protections during the mortgage financing process, but ultimately, longer closing timelines and fewer buildings that meet the standards for conventional loan financing.
The full review requires a more thorough look into a building’s financial and structural health when compared with a streamlined limited review. Lenders and borrowers may experience longer processing times during the transition period, according to the Mortgage Bankers Association.
“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,” an MBA spokesperson says.
The new rules will have a wide-reaching impact on certain buyers, especially those in markets that are heavily saturated by condos. AD Mortgage, a wholesale mortgage lender, says that since 2021, more than half of its Florida conventional condominium originations have relied on limited review.
Note that jumbo loans, which are conventional mortgages that exceed the conforming loan limit, are not impacted by these rule changes since they are already ineligible for purchase by Fannie and Freddie.
What Does the Full Review Entail and What Might Cause a Condo to Fail?
A full review is triggered when a lender is underwriting a conventional loan for a new condo project or an established project that hasn’t been subject to a full review within the past year. Not every loan will require a full review, since some condos will already have an active approval with Fannie Mae.
During the full review process, the lender will send a Condominium Project Questionnaire (Form 1076) to the building’s HOA or property management company to ask about the state of the building and its occupants. The condo may fail the full review if:
— The association budgets less than 10% of its annual income for reserves and repairs. (This threshold is increasing to 15% in January 2027)
— More than 15% of units are 60 or more days delinquent on their HOA dues or special assessment payments.
— The building’s reserve study, which is essentially the board’s financial planning tool, is more than three years old.
— The building’s master insurance policy is inadequate to cover replacement costs.
— The building has unresolved structural issues or deferred maintenance.
When a building fails the full review, it becomes nonwarrantable, meaning that buyers can’t finance a condo with a conventional conforming loan. If the HOA addresses the issues that caused it to fail the initial full review, then it’s eligible for another shot at conventional backing.
“As this progresses, people will get more comfortable with the current process and hopefully projects that don’t qualify currently under full review can take remedial efforts to get there,” says Corey Chubner, senior vice president of government affairs at AD Mortgage.
[See: Mortgage Rate Forecast: Predictions for the Housing Market Through 2028]
What Happens to Your Loan When a Building Fails the Review?
Just because a building fails the GSE’s full review doesn’t mean the purchase contract automatically falls through. Instead, it means that the buyer can’t use a standard conventional loan to finance the purchase and must turn to nonqualified mortgage loans or non-QM loans.
A non-QM loan doesn’t meet the traditional criteria that lenders use to approve more common types of loans, and it can be more expensive to repay than a conventional loan. Chubner estimates that, on average, the rate will be 25 to 50 basis points (in other words, a quarter-point to a half-point) higher on a non-QM loan versus a conventional loan.
“In today’s day and age where every dollar matters, affordability is the buzzword that’s really at the forefront of all the discussions,” Chubner says. “Potentially freezing out a borrower from a conventional loan when they would otherwise be extremely creditworthy could be problematic.”
In addition to the higher rates of a non-QM loan, the borrower “will have to incur costs — inspection costs, appraisal costs — associated with the review process, that they wouldn’t necessarily have had to under the limited review,” Chubner says.
Advice for Buyers Looking at Condos After the Changes
Buying a condo with a mortgage has always required some level of involvement from the HOA or property management company. However, their role in the process has a more tangible impact during a full review. Here are a few tips to consider in today’s environment if you’re planning on taking out a conventional loan to finance your condo purchase.
— Don’t wait until you’re under contract to act. Before writing an offer, ask your lender to look up the complex in Fannie Mae’s Condo Project Manager, or CPM, database. If the building has failed the review process, it will have been flagged as “guide ineligible” by another lender. On the other hand, a full review isn’t needed for every loan. If a lender has already completed a full review for the building, it will show in the GSE’s systems as approved, allowing you to move forward with your offer.
— Shore up your purchase contract with condo-specific language. Be sure to choose a real estate agent with sufficient condo experience. They might recommend including a contingency that gives you sufficient time to review the HOA’s paperwork yourself to look for red flags. Some documentation to assess with your agent includes the latest board meeting minutes, the annual HOA budget, the master insurance policy and the most up-to-date reserve study.
— Be flexible with your closing timeline. “Patience is going to be necessary because it’s going to take longer for a project to get approved through full review,” Chubner says. In your purchase contract, request an extended closing timeline, such as 60 or even 90 days, as opposed to the typical window of 30 to 45 days. You can push out the closing date as long as needed if both sides agree in advance. Asking for an extension after the contract is signed may be met with resistance.
Finally, remember that the GSEs are implementing these changes for a reason. The strength of your individual financial profile doesn’t protect the mortgage lender — or you, as the borrower — against a building’s structural issues or a poorly managed HOA. Any problems that arise during the full review would have become apparent eventually, and it might be better to learn about them before committing to a specific condo.
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‘Patience Is Going to Be Necessary:’ Condo Buyers Face Hurdles Under New Mortgage Rules originally appeared on usnews.com
