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How New Fannie Mae Revisions To Its Project Standards And Property Insurance Requirements May Impact Transactions Involving A Condo Or A Residence In An HOA-Governed Community

By David Hamerslough and Victoria B. Naidorf

The sale and purchase of a condominium or a residence in an HOA-governed community has historically presented a range of potentially difficult issues that don’t arise in the sale and purchase of a non-HOA-governed detached single-family residence. These issues have included the need for buyers to carefully analyze the governing documents (e.g., the CC&Rs, bylaws, and rules and regulations), the minutes of the Board of Directors, the financial information (including budgets, reserve accounts/studies, and pending and future assessments or special or emergency assessments). Buyers of these properties also need to be concerned with rental restrictions, insurance issues, common areas and exclusive common areas, parking and storage, past, pending, and potential future litigation regarding the development, etc.

Fannie Mae and Freddie Mac have a set of standards (Project Standards) and a Selling Guide that establish requirements that must be met for a loan to be eligible to be sold to Fannie Mae or Freddie Mac involving a condominium or a residence in an HOA-governed community. Fannie Mae and Freddie Mac, in conjunction with the Federal Housing Finance Agency, revised their Project Standards and Selling Guide this year with respect to, among other issues, insurance coverage, financial reserves, and governance.

This article will briefly describe the new revisions, discuss how they may impact the sale and purchase of a condo or a residence in an HOA-governed community, and make some observations on what issues sellers, buyers, and real estate licensees should consider in view of these changes.

Why These Revisions Are Important

If you are buying or selling a condo or a residence in an HOA-governed community that does not meet these Project Standards, a lender looking to sell the loan to Fannie Mae and Freddie Mac may be unable to do so. This may limit a buyer’s ability to finance the purchase of such a property, potentially depressing the property values and marketability of properties within such a community. Fannie Mae’s publication of these revisions stated that they were intended to address projects with inadequate financial reserves. The concern was that a community with inadequate financial reserves typically does not have the resources to maintain the physical condition of the project or to fund unexpected operating expenses, resulting in substantial financial hardships to owners by way of unexpected special assessments or higher regular assessments or dues. The revisions are intended to address these issues and hopefully prevent mortgage defaults and/or foreclosures.

Highlights of Some Of The Significant Revisions:

Increases To The Budgeted Replacement Reserve Allocation

Effective January 4, 2027, the minimum reserve allocation for capital expenditures and deferred maintenance is increasing from 10% to 15% of the annual budgeted assessment income. A lender still has the ability to use a reserve study in lieu of the budget, but that reserve study must demonstrate that the project has adequately funded reserves and that those reserves either meet or exceed the highest recommended reserve allocation amount in the study. Fannie Mae’s revisions have eliminated the baseline funding method, which allowed reserve balances to approach but never fall below zero.

Sellers, buyers, and real estate licensees should also be aware of Assembly Bill 2050, which has passed the legislature but remains to be signed into law. This will require homeowners’ association, starting on January 1, 2032, to maintain a 30-year reserve fund to cover replacement and/or repairs of common areas. If the reserve account runs out at any point in that 30-year period, the HOA would have to re-fund it by allocating at least 15% of its annual budget towards the reserve until the reserve projections are in the black. The statute would also require the HOA to raise dues via a special assessment if the budget is not sufficient to address the required amount. Current California law requires associations to conduct a reserve analysis every three years, but there is no requirement that reserves be funded by a specific amount. This law will bring California HOAs into the new Fannie Mae/Freddie Mac standards. One distinction to consider is that the new California law will require this funding irrespective of any financing that is being sought for an individual transaction.

Elimination Of Limited-Review Underwriting Process

As of August 3, 2026, all loans needed to purchase condominiums or HOA-governed community properties will be required to comply with Fannie Mae and Freddie Mac’s full-review underwriting standards. We understand that currently, approximately 65% of such loans are processed using the limited review. That process did not involve an evaluation of the association’s operating budget. Under the full-review process, operating budgets, including reserve funding and financial stability, will be fully analyzed. Once again, we understand that this is in line with the reasons why these revisions have been implemented, as pointed out in the first part of this article.

Please remember that the revisions regarding, among other things, reserve accounts that are the subject of these revisions will now need to be met as of January 1, 2027. Annual budgets by the association will need to be adjusted accordingly, as well as the reserve study funding requirements.

Please also note that certain common-interest properties are exempt from the full-review process. These include 2-4-unit properties and potentially 5-10-unit properties, provided that they meet certain criteria. Notwithstanding this exemption, we understand that for any project with 10 or fewer units, a review of critical repairs and deferred maintenance will still be required.

Property Insurance Requirements

Coverage under a master policy issued to the HOA must now equal at least 100% of the estimated replacement cost value of the project improvements, including common elements and residential structures. Roofs are exempted from this criteria. Policies that provide coverage on an actual cash value basis or that depreciate losses will not qualify. There are other requirements regarding the perils that need to be covered under this policy, as well as a limit of $50,000.00 on the maximum deductible where the policy includes a per-occurrence and per-unit deductible.

An additional insurance requirement is that the borrower must obtain a policy on the individual unit that they are purchasing. This applies where any portion of the interior of the unit is not covered by the master policy or when the master policy includes a per-unit deductible. Individual policies also now have minimum coverage amounts, as well as limits on the maximum amount of the deductible. These new insurance requirements apply to any loan application dated on or after July 1, 2026.

Limits On Investor-Owned Property

The revisions have eliminated the prior 50% limitation on investment property ownership. This will result in a potential increase of investor-owned properties and a corresponding increase in the number of rental units in the project. This revision is effective immediately.

Potential Impact Of These Revisions

There is an expected increase in underwriting timelines that will need to be taken into consideration with respect to writing contracts containing a loan contingency and the corresponding impact on the close of escrow;
There may be an impact on the eligibility of a project to qualify for funding;
Sellers may want to consider whether the property/project will meet these new eligibility criteria. If not, sellers will need to consider the impact on the salability and/or the value of their property;
If there are extended delays in the underwriting process, sellers need to evaluate updating their disclosures so that they are fresher and meet any contractual requirements (e.g., last 12 months of minutes). Condominium sales in some areas and at some price points have been slow this year. Where a condo is listed and remains on the market for an extended period of time, sellers will also need to evaluate updating their disclosures;
Sellers should evaluate whether their HOA and/or management company are up to date on these revisions and are prepared to provide the necessary documentation to any buyer’s lender;
Buyers will need to quickly evaluate the availability and cost of insurance for the individual unit that meets the new criteria;
Buyers will want to evaluate the upcoming financial requirements (e.g., increased dues and/or special assessments) that may be necessary to satisfy the revisions to the financial reserves;
Buyers may want to evaluate the percentage of investor-owned (potentially rental) units in the community and any impact that may have on their interest in the property;
If the buyer is an investor purchaser, they will need to consider whether Fannie Mae and Freddie Mac will continue to require owner occupancy/second home/investor data;
Buyers need to consider whether the seller’s HOA disclosure documents are full and complete before removing any contingency. Under ¶ 14(B)(3) of the C.A.R. RPA, once a contingency is removed by a buyer regarding the seller’s disclosures, the receipt of additional seller’s documents does not reinstate any contingency for that review. There may, however, be a basis to terminate pursuant to ¶¶ 11(H) of the purchase contract if the buyer receives an amended or supplemental disclosure;
Buyers should consider retaining a qualified professional to evaluate all of the issues relating to the purchase of a condominium or other property in an HOA-governed community/co-op. There are a number of individuals and entities that provide this service. In addition, some CPAs will be qualified to review the financial reserve study and accounts;
C.A.R. has introduced a new product (HOA Snapshot) designed to provide an AI analysis of the HOA bylaws, CC&Rs, financial statements, Board meeting minutes, insurance documents, and reserve studies. Buyers should be careful not to rely exclusively on any AI analysis platform. Sellers, buyers, and real estate licensees will need to consider the pricing, timing, and completeness of the evaluation that can be obtained from a private individual/entity vs. this C.A.R. product. Consideration should also be given to the DRE’s advisory published on March 17, 2026 regarding artificial intelligence in California real estate.
Sellers and buyers of self-managed condominiums or HOA-governed properties need to evaluate the availability of governing documents and financial information necessary for any certification of the subject property that will be required by any lender, as well as the future viability of the subject property where this documentation/information doesn’t exist or adequate financial reserves have not been maintained.

Conclusion

Please remember that these revisions apply to not only condominiums but any residence in an HOA-governed community and to co-ops.

Refer to the Fannie Mae/Freddie Mac revisions for specific details for each of the subjects discussed in this article, as well as for other revisions.

Consult with qualified professionals regarding any questions on the revisions, compliance, and potential impacts on covered transactions.