How New Fannie Mae and Freddie Mac Rules Could Cause Loan Approval Delays for Condos

This week on The Breakdown, we discuss the new rules set in place by Fannie Mae and Freddie Mac for condo buyers and how the change could potentially affect the timeline for mortgage approval on condominiums. We’ll take a close look at what’s happening at Fannie Mae and Freddie Mac, what kind of rules are going into effect, and how these changes could affect your rental portfolio.

Big Changes at Fannie Mae and Freddie Mac

In August, new Fannie Mae and Freddie Mac rules went into place for condominiums that come with a tradeoff that’s dividing real estate professionals: Improved safety precautions with a longer mortgage approval process.

As of August 3^rd, several new rules have taken effect that promise more comprehensive reviews of condos and their documents before a mortgage is approved and a purchase is made, aiming at cracking down on condo safety. While these rules stand to keep condo tenants safer, prospective buyers may be uncertain about signing on for a longer timeline and potentially being denied a mortgage through the popular GSEs.

The major change being made is the review process. Prior to now, about 40% of all condo purchases qualified for a limited review of the condo before a mortgage was approved. The limited review was a streamlined way for Fannie Mae and Freddie Mac to check a condo’s eligibility for a loan before approval, requiring:

• 100% completion of project with no additional phases needed
• No more than 10% of units being owned by an individual or entity
• Commercial space to be limited to 25%
• Delinquency rates to be under 15% of units past 60 days due
• Borrowers to provide a down payment (10% for primary residences, 25% for second homes or investment properties)

Now, these requirements don’t meet the cut anymore. The limited review has been eliminated for most condo purchases, requiring a more in-depth, full review that will need to pass further checks before a mortgage is approved.

How Full Reviews Differ from Limited Reviews

The implementation of the full review holds the structural integrity of the condominiums at a much higher level than before. While the limited review focused primarily on the financial state of the condos, the full reviews will require checks of documents related to the condos structure to ensure there are no major repairs needed that have been neglected by the property owner. The full review also requires:

• Insurance documentation review
• Reserve study verification
• Annual operating budget and reserve fund analysis
• Delinquency and special assessment evaluations
• Full financial statements from the association

The full review requirement has already been put in place, but an additional rule will take effect on January 4^th, 2027: Condo association reserve fund requirements will jump from 10% to 15%, requiring 5% more of the annual budget to be set aside for repairs and replacements than before. If these requirements are not met, The GSEs can and will reject the mortgage application, so it’s vital for condo associations to begin making changes to their budgets now to account for the changes.

Of course, there is an exception to this rule. While 40% of purchases qualified for limited review before, there is still a group that is not required to complete full reviews under these new rules: Small projects. Condominiums with 10 or fewer units may use a waiver to opt into the limited review instead, while larger projects must stick with the full, comprehensive review.

Why the Safety Crackdown?

So, what happened to necessitate these rule changes to begin with? The answer lies in the 2021 Surfside condo collapse in Florida which took the lives of 98 people. The building had long-standing structural issues stemming from the pool deck which caused cracks in the columns and eventually caused the columns to collapse for part of the 12-story building, ending the lives of nearly 100 people.

Further review of the collapse uncovered that the pool deck’s maintenance and repair issues started all the way back in 1996 and that the issue had been pushed off by the condo association while they debated cost and scope of the project. These structural problems and lack of supervision of the repair issues caused a tragedy that became major news in Florida, soon after becoming a national conversation as well.

The state of Florida enacted state-wide condo reforms following the condo collapse, and condo underwriting became stricter nationally in the aftermath of the event. In that time, the new rules were introduced that went into effect this month, hopefully leading to safer condo purchases and safer tenants.

How Will the New Rules Affect Condo Buyers?

If you’re a prospective condo buyer, whether for yourself or for your rental business, you’re probably wondering how this change could affect your purchasing process. The probable answer: slight delays in the mortgage approval process (some estimate up to two extra weeks), more documents to be requested and delivered, and more avenues to be checked than before for approval. This could put a strain on everyone involved in the process, which is part of what will slow things down, according to Dawn Bauman, CEO of the Condominiums Association Institute:

“This transition will require substantially more documentation and formal lender questionnaires for nearly all condominium sales, which will increase the administrative burden on community associations, managers, and volunteer leaders. Without thoughtful implementation and support, this change has the potential to slow transactions and place additional strain on already constrained communities.”

But there are a few other changes real estate professionals are warning about, too.

Some condos that would be approved under a limited review could potentially be denied under a full review if the requirements are not all met. Some of this could even be out of the buyer’s control if the condo association itself is not following the rules. This could make the process much more difficult for condo buyers, or stop the sale altogether—while you could still obtain a loan through a lender, they could charge you a higher interest rate or down payment than you would have originally paid.

Additionally, with higher reserve requirements coming in January of 2027, it’s a possibility that condominium dues could increase to offset the extra 5% of their budget that must be set aside for repairs. Steep dues increases would make condo living less affordable for residents and less profitable for investors.

The silver lining is that this process won’t be a problem for every condo forever. Once a condo goes through the mortgage process with Fannie Mae and Freddie Mac, it is filed as “approved” in their system and won’t need to be reviewed the next time a loan is needed for that property. For investors, those looking for a second home, or those simply looking to purchase further down the line, this inconvenient review may not be necessary every time with every unit.

How the Condo Mortgage Approval Process Looks Moving Forward

The new rules put in place by the GCEs just went into effect as of August 3^rd, so we’ve yet to see how these changes work in the long term. As a condo buyer, you may have a completely normal experience with a full review, or you may have a longer, more in-depth process than you were hoping for.

Though these rules were put in place to prioritize safety for condo residents, we’ll now have to keep an eye on whether the mortgage approval process will become more difficult and if condo dues will increase at all due to higher reserve requirements.

For those looking to buy a condo in the near future, the best advice to follow at this current moment is to be proactive. If you’re able to request and receive the documents required for a full review in advance, you may be able to mitigate some of the lengthiness of the process since waiting on documents is part of what will make the review take longer. By getting your documents ready early and keeping them in order, you’ll be able to keep things moving more quickly.

As for other changes in the Fannie Mae and Freddie Mac mortgage application experience, we’ll have to wait and see. We hope that with this understanding of the new rules and how they function for buyers, you’ll be well equipped to make an informed purchase on your next condo with as much efficiency as possible.