Imagine, if you will. You are newly elected to be on the board of directors for the condominium community you live in. You have promised to do your best to keep HOA dues down and real estate values up. Then, on your way to your first board meeting, you hear something about a bunch of new changes in lending guidelines and reserve requirements for condos. What changes will be made, and how will they affect the way the HOA is run and its homeowners?
I’ll explain.
Who Is Changing Condo Lending Guidelines and Who Needs To Know?
The Government-Sponsored Enterprises (GSEs), known as Fannie Mae and Freddie Mac, are making changes to the condo lending guidelines. Some of these changes are more significant than others. All lenders who make loans on condos, real estate professionals who sell them, condominium managers, and association board members need to know about these important changes.
Anyone considering buying or selling a condo will also want to know about the changes in the guidelines, as they may affect the sale. In fact, even if you just own a condo, you should be familiar with the general changes in these rules, as they can affect the value of your investment as well as how the homeowner’s association should be run.
What Changes in Condo Lending Guidelines Are Being Made?
The most important changes affecting condo lending include:
- Higher reserve requirements: The most significant of these new changes is starting January 2027, where HOAs will be required to set aside a minimum of 15% of the annual budgeted income into their reserve account for future capital expenditures. In other words, for every $1,000 in dues that are assessed, at least $150 must go into the reserve account. This is a significant increase from the previous amount of 10%.
There does seem to be an option where an association can use a reserve study to demonstrate the project has “sufficient reserves” when the minimum of 15% is not being met. The GSEs are asking to see that the association has reserves at a level that, according to the reserve study, is at the “highest recommended reserve allocation”. Unfortunately, reserve studies are not written in that exact language. Fannie Mae is in the process of “updating this policy to clarify”.
Fortunately, this increase was announced in March 2026, giving homeowner associations some time to address the new 15% minimum when planning their 2027 budget.
- Minimum 50% owner occupancy requirement eliminated: Fannie and Freddie have retired their 50% investor concentration limits for established communities. This means that HOAs no longer have to worry about preserving a 50% owner occupancy ratio to maintain their conventional financing eligibility.
This is great news for communities with larger numbers of investor owners. In the past, financially sound HOA communities could slip below the 50% owner occupied mark, causing them to be ineligible for conventional financing. It will be interesting to see if this new rule will help increase or decrease owner occupancy, since having it retired will make owner-occupied options more affordable in communities that have passed the old threshold.
Rules restricting condo owners’ ability to rent are a great topic to cover in more depth in a future blog. For now, it is nice to see the 50% investor concentration cap eliminated.
Condo Association Insurance Requirements
Freddie Mac and Fannie Mae have made some adjustments in their association insurance requirements. This is no doubt in response to the challenges in the insurance market.
These changes include:
- Higher association policy deductibles: Deductibles of up to $50,000 are now allowed, provided individual owners carry adequate supplemental insurance.
- Roof coverage: Roof coverage no longer needs to be at full replacement cost basis, but at Actual Cost Value.
- Coverage sufficiency: Coverage must still equal 100% of the project, but the documentation requirements have eased.
Covering these requirements may be too esoteric for most of the public, but they are good examples of why it is important to have well-informed insurance, lending, and management professionals on your team. As someone who is involved in a lot of condo sales, it is nice to see these requirements eased.
Revised Condo Review Requirements
Established condo projects with 10 or fewer units may now qualify for a Waiver of Project Review, often referred to as a WPR. While projects previously eligible for a Limited Review must now go through a Full Review unless they are 10 units or less and qualify for a WPR.
Essentially, the approval process for smaller complexes got a little more reasonable, while the process got a little stricter for larger projects. This is pretty technical and another example of why you need to have a team familiar with condominiums on your side.
Does It Matter if a Condo Community Meets the GSE Guidelines?
Yes, it absolutely matters if a condo project qualifies for GSE (Fannie Mae / Freddie Mac) guidelines. The majority of condos do meet the GSE lending guidelines. Those that don’t qualify will have limited financing options and use what are commonly known as non-warrantable loans. Non-warrantable loans will have less attractive terms, including higher interest rates, greater down payment requirements, and larger origination fees.
These less attractive loan options will affect the marketability and ultimately the value of the condominiums in the project.
Bottom Line
The Government Sponsored Entities (GSEs) that back the majority of home loans, namely Fannie Mae and Freddie Mac, have made some changes to their lending guidelines. Everyone who owns a condo or is thinking of buying one should know that every condo lender, real estate professional, association manager, and HOA board member needs to know.
These changes include the increase in reserve requirement from 10% to 15% and the elimination of the 50% investor concentration limit. They also adjusted some of the requirements for condo association insurance, along with changes in the condo review process.
Some things got stricter, like the reserve requirements and the elimination of the Limited Review process for condo projects over 10 units. While a few things have eased, like condo association insurance requirements, the Waiver of Project Review for established condo projects with 10 or fewer units, and the elimination of the 50% investor concentration cap.
The elimination of the 50% investor cap should help a lot of communities with many rental units. The new reserve requirements of 15% could be initially problematic for some communities, but helpful in the long run. At least it does not go into effect until January 2027, so HOA boards and condo managers will have time to adjust their next budget.
It is more important than ever before to stay educated and work with professionals who understand condominiums. They are a terrific housing alternative and can be pretty good investments, too.
For Real Estate Advice
Thank you, and we hope that you found this helpful and informative.
If you are looking for a real estate broker to guide you through the sales process or a reliable property management company to help you handle a rental property in Long Beach, Los Angeles, or Orange County, California, or if you are just considering it and have a few questions about real estate, contact the Mike Dunfee Group today! We are happy to help.
Dunfee Real Estate Services, DRE # 02026232
