Fannie Mae & Freddie Mac Policy Changes

Fannie Mae and Freddie Mac have announced significant updates to their lending requirements, focused primarily on condo project standards and property insurance rules. These changes, outlined in Fannie Mae Lender Letter LL-2026-03, are designed to address rising insurance costs, improve the financial health of condominiums, and reduce operational complexity for lenders and servicers. 

Below is a breakdown of the most important changes and what they mean for condo associations and potential buyers.  

Note: This is not a legal blog, nor does it provide legal advice. Associations should defer to their attorney for any explicit legal questions or advice. 

Why These Changes Were Made 

Over the past several years, community associations have faced growing challenges tied to: 

• Rising insurance premiums and reduced carrier availability 

• Underfunded condo reserves 

• Deferred maintenance and critical repair risks 

• Inconsistent project review standards 

In response, Fannie and Freddie worked with FHFA and industry stakeholders to balance flexibility with stronger long-term risk management, particularly for condo projects. 

Limited Review Process Retired 

Projects previously eligible for the limited review process must now use Full Review or Waiver of Project Review. Previously, low-risk properties could fast-track their review process by undergoing a review of basics such as adequate insurance coverage, no active litigation, and no critical repairs or unsafe conditions.  

The limited review process did not require a full analysis of the property’s finances or condition. Historically, lenders approved loans with limited information roughly 60% of the time.  

Beginning August 3, 2026, all projects will be subject to the full review process or, when applicable, the Waiver of Project Review process. The full review process involves increased scrutiny and a more detailed analysis of each property’s finances and physical condition, including review of operating budgets.  

This added scrutiny may surface issues such as special assessments or outstanding loans, which could question their funding adequacy. Because full reviews require more documentation and time, boards and managers should prepare for an increased burden when handling these transactions.  

Stronger Reserve Study & Reserve Funding Requirements 

To address underfunded condo projects, Fannie Mae has tightened reserve rules: 

Increased replacement reserves 

• Minimum reserve funding increases from 10% to 15% of annual budgeted income 

Enhanced reserve study rules 

• If a reserve study is used for justification to fund below 15% of annual budgeted income, the project must budget for the highest recommended reserve amount 

• The baseline funding method (allowing reserves to approach zero) is no longer permitted 

Boards, managers, and reserve providers should begin evaluating reserve funding now. These requirements may result in: 

• Increased assessments. 

• Adjustments to long-term financial planning. 

• Greater scrutiny during the lending process. 

Boards and managers should prepare to evaluate their reserve funding levels, as this increase may present challenges in some communities. Rather than simply increasing reserve funding by 5%, associations should conduct an up-to-date reserve study to gain a true understanding of where their funding needs to be.  

It is best practice to follow the funding recommendations in your reserve study rather than relying on the 15% requirement, as the funding required for adequate reserves is not a one-size-fits-all percentage. 

For small properties with limited common elements, a reserve study may show adequate funding levels at less than 15% and may be used to justify lower funding levels. 

These changes are aimed at preventing special assessments, project deterioration, and borrower defaults, but they may make some condo associations ineligible. 

While these changes may add complications to lending requirements, we are here to help address any questions boards and managers may have. We will continue working alongside industry experts to determine how these guidelines are being interpreted locally. 

If you have questions or concerns about how these changes impact your community, please do not hesitate to reach out.  

To view Fannie Mae’s full lender letter, click here.