New Condominium Financing Rules: Is Your Association Ready?
By Attorney Lindsey Wrubel
Effective August 3, 2026, there are important changes to regulatory guidelines concerning condominiums in the United States. This also applies to attached townhomes with 5 or more units attached. This does not apply only to FHA- and VA-financed condos, as it has in the past; however, your Board must be aware of these new requirements, as the requirement for full condominium project reviews may negatively impact any potential buyer’s ability to obtain financing within your association.
The fallout may mean that if your association cannot be certified through a full condominium review process, your community may be able to sell association units solely on a cash basis. This would significantly impact the market values of condominium units in your association and halt potential sales.
Reserve Funding
The most significant change to these condominium financing requirements is that the association must now allocate 15% of the annual budget to the reserve fund. This will be a radical change for several associations that have chosen not to fully fund their reserve accounts according to recent reserve studies, who have consistently waived the reserve requirements over a period of years, or who have chosen not to obtain reserve studies at all.
The 15% reserve requirement may be waived if the association completed a reserve study in the prior three years and is funding according to that reserve study. If the owners have waived the reserve requirements set forth in the reserve study, the association is still required to allocate at least 15% of its annual budget to the reserve fund.
This is very important for budget planning in the coming months for 2027, as this funding requirement will become effective January 4th, 2027.
Full Condominium Review Process
While lenders previously engaged in a limited review process for condominium projects effective before August 3rd, 2026, a full review process will be required for any condominium association with more than 10 units.
This means potentially extended closings due to the nature of the review process, additional paperwork required of the association's board of directors and managing agent, and cooperation required to facilitate closings in a timely manner.
Generally, a condominium unit sale will require the association or its property manager to complete and certify the accuracy of a condominium project questionnaire. These questionnaires can be time-consuming and sometimes refer to items that are not readily available to the board or property management. For those reasons, these questionnaires are not popular, and some board members and managing agents are leery of certifying specific facts about safety, ratios, or any other item they do not know for certain.
However, if these questionnaires are not timely provided to the mortgage company for the potential buyer, it could result in a lost sale for the unit’s seller, and also become an issue as to the association's failure to cooperate in a transaction, which might result in claims for tortious interference with the contract for a sale that falls through.
Significant Maintenance Issues
If a lender finds evidence during the review process of significant deferred maintenance in the association, it may decline to offer funding for that particular loan. Examples of deferred maintenance include but are not limited to: outstanding building code violations, lack of evidence of current reserve studies, lack of evidence of engineering reports, and physical evidence of not completing repairs recommended by a reserve study.
An example of unacceptable deferred maintenance would be a reference to a need for a roof replacement in 2014, but in 2026, the roof still has not been replaced and has only been significantly patched. Not only will this create an issue for condominium project financing, but it could also cause an issue for the association in obtaining property casualty insurance coverage.
Proper Insurance Coverage
If associations do not have the proper insurance coverage, the unit sale cannot be completed if a loan must be funded. This means that if your association has had coverage dropped due to maintenance issues, needs for repairs, or significant deferred maintenance, you will need to, as a board, ensure that all of your punch list items from your insurance company are completed, and that you have obtained the proper property casualty insurance coverage for either the condominium’s master policy or individual townhome policies.
Keep in mind that for townhomes and some condominiums, insurance requirements may be those of the unit owner rather than the association, depending on the construction of the insurance article in the declaration.
Threat of Special Assessments
If significant, high-dollar-value projects are outstanding within the association and there is no proper reserve funding, lenders will take into account the association's reserve funds versus needed projects and may anticipate the need for a special assessment in order to fund those projects. If there are anticipated special assessments that are identified through the full review process, it is possible that the lender will negatively attribute the special assessment needs to a borrower's debt-to-income ratio. This may reduce a buyer's spending power, which may result in failed purchase agreements where a buyer would have otherwise been qualified to purchase the unit.
Questions Regarding New Requirements
If you have any questions about
these new requirements, please let us know, and our legal team will be happy to assist with any issues your community may come across. We look forward to working through these new standards with your board and/or property manager so that these closings may go as smoothly as possible.
For more information, please see: https://singlefamily.fanniemae.com/media/29411/display
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