Fall of Florida’s Champlain Towers South Prompts Changes in Condo Loan Rules

Conventional mortgage backers Fannie Mae and Freddie Mac have solidified updated policies for loans to condo buyers. There are a few new requirements now going into effect, to be part of these loan-backing giants’ permanent rules.

They’d only been temporary provisions until now.

Here’s a Q&A to answer some basic questions on the new rules.

What’s the Backstory?

New sustainability and safety measures debuted in 2021, amidst rising concerns over financial risks connected with older buildings, and those not built to withstand modern weather and climate impacts. The catalyst? The collapse of a section of Champlain Towers South, which killed 98 Miami condo residents.

Since then, policy makers have modified their seller guidance to bar financing for condo or co-op units in buildings that need critical repairs, or whose unsafe condition have made them subject to evacuation orders.

Following instructions from the Federal Housing Finance Agency (FHFA), both Fannie Mae and Freddie Mac, simultaneously, hashed out their vetting rules on condos and co-ops. The rationale is the same for both entities. Lenders need to know their collateral is in jeopardy if they are looking to finance condos situated on properties in need of repairs, safety modifications, or structural fortifications.

Fannie Mae’s and Freddie Mac’s updates are the latest evidence of a growing emphasis on building safety and sustainability in today’s condo financing sphere.

What Mortgages Will Be Impacted—And How?

The new rules will impact buildings containing at least five units. Here’s how:

Loan applications will require thorough reviews of the building’s condition, even routine repairs, covering three years.

Condo developers must disclose significant maintenance issues, so potential buyers know what’s ahead of them. (The term “condo” applies broadly and includes, for example, the co-ops and lofts of New York City).

Also protecting its own interests, Fannie Mae and Freddie Mac will not buy mortgages on condo and co-op properties unless and until needed fixes are done.

Properties needing repairs that would cost at least $10,000 per unit cannot have Fannie Mae mortgages.

And, as always, lenders are asked to review the special assessments imposed on the condo property’s unit owners, to uncover any serious problems at the properties. At the same time, they need to size up the capacity of the condo unit owners to cover the extra costs the condo owners have to deal with when facing special assessments.

But how can a buyer know what’s going on? Fannie and Freddie are going to need to communicate with lenders and mortgage consultants. As of Jul. 29, 2023, for example, Freddie Mac will start updating its assessment messages to state that the condo may need critical repairs. (To review Freddie Mac’s standards, news, and updates related to financing condo and co-op properties, see its Condo Project Advisor®.)

What if the condo building can’t qualify for a conventional loan on account of maintenance needs? Then the buyer will look for a different home to buy, or look for a different lender.

Why Do Fannie and Freddie Matter So Much?

Fannie Mae and Freddie Mac are powerhouses of U.S. residential financing. They’re well known for backing “conventional” loans (as distinguished from government-backed loans like VA, USDA, and FHA mortgages).

Condo buyers and lenders may look to Fannie Mae and Freddie Mac for their financing needs for condo properties that meet a set of guidelines (which we’ll talk about below). And of course, the condo buyer also needs to be financially positioned to meet a list of loan approval criteria, so as to minimize risk of default on the loan.

☛ What is… The Best Conventional Mortgage: Fannie Mae or Freddie Mac?

People finance condos with Fannie and Freddie for various reasons. They might want a way to break loose of private mortgage insurance. They might like Fannie or Freddie because of their interest rates and terms. Or perhaps their credit profiles are good fits for these loans.

In any case, Fannie and Freddie are a key financial force. They buy home loans from lenders. By making them into securities for investors, they enable the mortgage-lending sector to pull in funding and keep producing loans.

☛ Take a brief look at the history of U.S. home financing, and how Fannie Mae and Freddie Mac fit in.

What Rules Exist Already, Before the Additional Standards?

Of course, there were already standards for the properties that Fannie and Freddie will accept as loan collateral for condo purchases. Here are some key examples of Fannie Mae’s normal, ongoing guidelines that need to be met for a condominium to be eligible for financing:

The building and its amenities must already exist. The loans are for presently existing properties, not developments in the works.

The property isn’t supposed to be a de facto apartment complex. No more than half of the units can be rented out.

At least 85% of the condos on the property have to be current on their payments to the homeowners’ association (HOA). Current means no more than 60 days overdue.

The HOA has to be current on a “master policy” to cover damages on the common (shared) elements of the property. Additionally, buyers of the units purchased condo owner policies to cover issues involving their own units.

The property should have an adequate budget and reserve funds.

No specific owner should hold deeds to more than 10% of the property’s units.

No aspects of the property’s safety, structural integrity, or habitability should be the subject of lawsuits against the HOA.

The condo property can be dedicated to business use only up to a point. Business use may cover only up to 35% of the square footage of overall floor space.

So, just because a condo or co-op unit is habitable, safe, and well built, that doesn’t always mean a conventional loan can be issued. There are all these other criteria to follow.

☛ What Does a Condo Deed Give You? Can You Be Forced to Sell?

What If the Condo Doesn’t Measure Up?

If a condo falls short of meeting standard guidelines, it’s non-warrantable. Examples of non-warrantable homes may be condos with more than half the units rented out, or developments that are not yet finished, or condos with certain rules for membership. In the case of a non-warrantable condo, here again, a buyer has to go look for a different home to buy, or find a lender offering non-warrantable condo mortgages.

Ask your mortgage consultant about the eligibility of the specific condo property you decide to buy. And note: lenders themselves (in addition to Fannie or Freddie) have criteria for an acceptable real estate asset.

One key point, as we conclude, has to be highlighted. With proper attention to the rules, a conventional loan approval signals a condo property that was vetted for structural risks and major repair needs.

Supporting References

Freddie Mac Selling Guide: Bulletin 2023-15 – Bulletin Announces Updates to Condominium and Cooperative Projects (Jul. 5, 2023).

Fannie Mae Selling Guide (updated Jul. 2023).

LALoftBlog.com: Revealed – How Fannie Mae’s Latest Condo Loan Policy Shake-Up Could Protect You Wallet and Well-Being (Los Angeles, Jul. 18, 2023).

Chris Clow for HousingWire.com: Fannie Mae and Freddie Mac Update Condo, Co-Op Policy Guidance (Jul. 6, 2023).

And as linked.