The Condo Underwriting Changes That Are Reshaping What Is Possible and What Is Not

Jodi Hillmar has an important update for anyone involved in a condo transaction right now. Earlier this year several changes hit the books and starting August 3rd more are in effect. Some of these changes open doors that were previously closed. Others add requirements that will slow down or complicate deals that might have sailed through before. Understanding both sides of what changed is essential for buyers, agents, and anyone working through a condo purchase right now.

What Changed on the Conventional Side With Fannie Mae and Freddie Mac

The fifty percent investor cap on condo projects has been eliminated. This is genuinely good news. Some developments that previously could not qualify for conventional financing because too many units were investor-owned may now be eligible. However eligibility is not automatic. The project still has to pass a full review and may still get stuck on other requirements. The removed cap opens a door but getting through it still requires clearing everything else.

On the insurance side the requirement for replacement cost coverage on roofs has been updated. Actual cash value coverage for roof replacement is now acceptable. Previously lenders required a policy that covered inflation on the replacement cost which drove insurance expenses higher. The shift to actual cash value coverage is designed to help reduce insurance costs for condo associations and the buyers who finance units within them.

A new maximum fifty percent per unit deductible replaces a more complicated calculation that was used previously. The simplification makes it easier to evaluate whether a project meets the insurance requirement without working through a complex formula.

The reserve requirement is increasing from ten percent to fifteen percent of the annual budget effective January 4th 2027. Many condos and investors are making this change now rather than waiting. The good news is that projects with adequate reserves already set aside may qualify to maintain the ten percent threshold. The reserve study is the mechanism that determines that. Every three years condos are required to commission an in-depth study of future repairs, maintenance needs, projected costs, and how much must be kept in savings to cover them. That study is the document that tells the lender whether the project's financial health supports the ten percent exception or requires the full fifteen.

The Elimination of the Limited and Streamlined Review

This is the change that will have the most immediate impact on transactions. The limited review and streamlined review were fast-track processes that allowed buyers putting more than ten percent down to skip the deep dive into HOA finances. That option is gone effective August 3rd for any project with ten units or more.

Every condo deal now goes through a full review regardless of down payment size. Underwriters are checking reserve funds, insurance coverage, litigation history, and everything else on every single deal. There is no shortcut based on how much the buyer is putting down.

A streamlined waiver remains available for projects with ten units or fewer. For anything above that threshold the full review is mandatory.

What This Means Practically

The deeper dive into HOA finances is going to surface issues on projects that previously cleared the limited review without scrutiny. Underfunded reserves, inadequate insurance, pending litigation, and other HOA problems that were not examined under the old fast-track process will now come up during underwriting on every conventional condo deal.

Starting the process early and getting the project reviewed before the appraisal is ordered is more important than ever because discovering a project problem late in the transaction creates delays or kills deals that could have been anticipated with earlier due diligence.

FHA and VA Condo Financing

FHA and VA both maintain master approved condo lists. FHA approvals come with expiration dates. If a development is not on the approved list there is a single unit approval option commonly called a spot approval that can open the door for an individual unit without requiring full project approval.

The building still has to meet requirements including strong reserves, no major litigation, and fifty percent or more owner occupancy. But a spot approval means that a unit in a non-approved complex is not automatically a no. It requires more work and the appraisal cannot be ordered until the project is cleared so starting early is critical. But the path exists and it is worth exploring before turning away a buyer who wants to purchase in a non-approved development.

Before You Say No on a Condo Deal

Jodi Hillmar's message to agents and buyers navigating this landscape is direct. Before you walk away from a condo deal because of financing concerns call and talk through the possibilities. The rules have changed in ways that close some doors and open others and knowing which category a specific project falls into requires someone who understands where the new lines are drawn.

Call Jodi Hillmar to work through the details on any condo deal and find a path forward for your buyer.

Sources

FannieMae.com
FreddieMac.com
HUD.gov
VA.gov
MortgageNewsDaily.com