US: Condo buyers face new mortgage approval requirements

The two government-sponsored enterprises, which purchase mortgage loans from banks and channel them into the secondary mortgage market, are implementing new policies from 3 August for mortgages involving condominium properties.

The changes mean that, in many cases, lenders will no longer assess only the buyer’s financial position and creditworthiness, but will also conduct a detailed review of the building itself and the management of the condominium association.

Areas under review will include homeowners’ associations’ finances, the level of reserves available for future repairs, insurance coverage, building maintenance, and any significant technical or structural issues.

Concerns Over Delays and Loan Rejections

The objective of the new rules is to identify residential developments facing financial or construction-related problems at an earlier stage and reduce the risk of owners being confronted with unexpected special assessments or significant increases in association fees.

However, representatives of the mortgage industry estimate that the changes could result in longer loan approval times and, in some cases, the rejection of applications if a building fails to meet the new requirements.

Max Slyusarchuk, CEO of AD Mortgage, warned that purchasing a condominium could become significantly more challenging, as stricter reviews are expected to increase the number of applications that fail to meet financing criteria.

His company sent a letter in July to the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, requesting that the implementation of the new rules be amended or delayed.

Building Safety at the Center of the New Framework

The tightening of the regulatory framework is closely linked to the collapse of the 12-story Champlain Towers South condominium complex in Florida in June 2021, which resulted in the deaths of 98 people.

The tragedy highlighted the risks that can arise when major repairs are postponed, homeowners’ associations maintain insufficient reserves, and maintenance problems are not addressed in a timely manner.

Following the collapse, Florida introduced reforms, including mandatory inspections for older buildings and requirements to address structural issues and ensure adequate funding of reserves for future repairs.

At the national level, Fannie Mae and Freddie Mac had already tightened their lending standards in the months following the disaster, excluding from financing buildings with significant maintenance problems, critical repair needs, or certain types of special assessments.

Measures that were initially introduced as temporary were largely made permanent in 2023.

The US Condo Market

The stricter rules affect a particularly important segment of the US housing finance market. According to the National Association of Realtors, the median price of a condominium or co-op unit stood at $380,000 in June, up 1.6% year-on-year, compared with $446,400 for a single-family home. Overall, the US had approximately 8.6 million condominium units in 2023.

The new environment creates an additional layer of scrutiny for prospective buyers: it is no longer sufficient to have adequate income, a strong credit profile, and the required down payment. The condominium building itself must also be considered sufficiently safe, financially sound, and properly maintained for the mortgage to qualify for financing through the secondary market.

The development is expected to increase pressure on homeowners’ associations to maintain adequate reserves, complete necessary repairs promptly, and secure sufficient insurance coverage. At the same time, it may make the condominium purchasing process more complex and time-consuming, particularly for older buildings or developments facing maintenance issues or insufficient funding for future capital needs.