On March 18, Fannie Mae and Freddie Mac issued a significant update to their project standards and property insurance requirements. These changes reflect the realities of today’s housing market and focus on the long-term financial sustainability of condominium communities based on Fannie Mae and Freddie Mac criteria, which aren’t always aligned with actual financial stability and performance.
These updates, outlined in Lender Letter LL-2026-03, are designed to simplify certain processes, respond to insurance market challenges, and strengthen the financial health of condominium communities.
For community associations, board members, managers, and business partners, these changes are important and, in some cases, consequential.
A Shift Toward Project Reviews
One of the most notable changes is the “retirement” of the limited review process, which will be fully eliminated for loans with application dates on or after Aug. 3. Eliminating limited review is a consequential change for the condominium market.
Historically, limited review represented roughly 40% of all project reviews. Doing away with it shifts a significant portion of transactions toward a more rigorous full review process. This transition will require substantially more documentation and formal lender questionnaires for nearly all condominium sales, which will increase the administrative burden on community associations, managers, and volunteer leaders.
Without thoughtful implementation and support, this change has the potential to slow transactions and place additional strain on already constrained communities.
Moving forward, lenders will rely on either:
- Full review or
- Waiver of project review
There is expanded eligibility for a waiver of project review to include projects with up to 10 units, providing greater flexibility for smaller communities.
Additionally, the long-standing investor concentration limit (50%) has been eliminated, and Florida-specific review requirements for new, attached condominium projects also are being retired.
These changes shift greater responsibility to lenders and associations to demonstrate that condominium projects are financially sound based on Fannie Mae and Freddie Mac guidelines.
Stronger Financial Expectations for Condominium Communities
Fannie Mae & Freddie Mac are increasing the minimum reserve funding requirement from 10% to 15% of the annual budget effective Jan. 4, 2027.
15% budget allocation is not required if a condominium association has a reserve study that has been conducted or updated within the last three years and the association is following the highest recommended level of funding (baseline is not allowed).
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.
Insurance Requirements Adapt to Market Realities
Fannie Mae and Freddie Mac also made meaningful adjustments to property insurance requirements in response to rising premiums and limited availability in many markets.
Key updates include:
- Elimination of strict replacement cost documentation requirements.
- Removal of the requirement to insure roofs at full replacement cost.
- Greater flexibility in how coverage sufficiency is determined.
For condominium associations:
- The inflation guard requirement has been removed.
- A new maximum deductible of $50,000 per unit will apply beginning July 1.
At the unit level:
- Owners must carry insurance (usually in the form of an H06 policy) when gaps exist in the master policy or when deductibles apply.
- Coverage must align with either interior exposure or the master policy deductible.
These changes acknowledge the challenges associations face in today’s insurance market, while still maintaining a baseline of protection. However, the new deductible cap may create compliance challenges for communities currently carrying higher deductibles.
New Responsibilities for Servicers—and Increased Communication
The update also introduces new expectations for loan servicers including:
- Annual verification of insurance coverage.
- Monitoring for reductions in coverage.
- A new requirement to remind borrowers annually to maintain insurance.
These changes take full effect by Jan. 1, 2027.
Expect more consistent communication around insurance coverage and increased oversight throughout the life of the loan.
What Community Associations Should Do Now
- Review your reserve study and funding levels.
- Evaluate your insurance coverage and deductibles.
Prepare to provide this information in lender questionnaires for upcoming sales in your condominium community.
- Engage your management team (CMCA®, AMS®, PCAM® and AAMC® company), insurance professionals (CIRMS®), reserve professionals (RSTM), and legal advisors (CCALTM fellows).
- Begin planning for compliance with 2026 and 2027 implementation timelines.
Condominium communities are strongly encouraged to proactively confirm their eligibility status with Fannie Mae and Freddie Mac by reviewing current ineligible project lists. If your community now meets the insurance coverage, visit these websites to begin the process with Fannie Mae and Freddie Mac.
Taking these steps can help restore access to conventional financing, support property values, and ensure buyers and owners benefit from a more competitive and accessible lending environment.
As always, CAI will continue to monitor implementation and provide resources to support community associations navigate these evolving requirements.
Question about this statement:
“Associations must follow the highest recommended funding level identified in reserve studies.
The baseline funding method is no longer permitted.”
It is understandable that baseline is not permitted. Does “highest recommended funding level” mean 100% Full Funding only or will a Recommended Threshold Funding Level like 70% be permitted?
Thanks for this timely update. The interpretation of requirements and questionnaires between lenders can be astoundingly different.
My (non-legal) interpretation is that you must follow the this most conservative funding plan in the report and that the study must show something higher than baseline funding. So even a relatively small threshold (1%) would suffice, if that is the highest recommended funding requirement shown by your reserve study provider. Most studies show something greater than baseline funding, already as baseline is the least conservative (most risky) of the three funding goals.
Showing a 1% reserve contribution won’t meet the 15% minimum on a Fannie Mae or Freddie Mac application.
A small threshold reserve contribution of 1% won’t meet the 15% minimum threshold.
Barry, 15% of the annual budget is NOT the same as 15% funded. Percent funded is the reserve balance on hand divided by the fully funded balance (FFB).
Threshold funding will still be accepted and is usually preferred for most communities in my experience. Threshold funding is simply defined as “Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amounting goal” The Fannie Mae requirements state that the funding goal can not be “Baseline” which targets a cash balance of $0 or (0% percent funded). It seems communities are still able to pick a reasonable threshold, but would encourage them to work with their reserve study provider to identify an appropriate amount based on the specifics of the association.
In my example above, I was just trying to point out that you do not need to be 15% funded at all times, and that a lower threshold would meet their requirements. Perhaps I should have worded it differently “…a relatively small threshold (anything over $0) would suffice, if that is the highest…”
Threshold amounts and percent funded are determined in your reserve study based on the costs and remaining useful lives of the reserve components. They are not a direct function of the annual budgeted income assessment. In my experience, there are communities that function well with less than 15% of the budget directed towards reserves, while most require a higher portion of the operating budget to be directed to the reserves.
Barry, 15% of the annual budget is NOT the same as 15% funded. Percent funded is the reserve balance on hand divided by the fully funded balance (FFB).
Threshold funding will still be accepted and is usually preferred for most communities in my experience. Threshold funding is simply defined as “Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amounting goal” The Fannie Mae requirements state that the funding goal can not be “Baseline” which targets a cash balance of $0 or (0% percent funded). It seems communities are still able to pick a reasonable threshold, but would encourage them to work with their reserve study provider to identify an appropriate amount based on the specifics of the association.
In my example above, I was just trying to point out that you do not need to be 15% funded at all times, and that a lower threshold would meet their requirements. Perhaps I should have worded it differently “…a relatively small threshold (anything over $0) would suffice, if that is the highest…”
Threshold amounts and percent funded are determined in your reserve study based on the costs and remaining useful lives of the reserve components. They are not a direct function of the annual budgeted income assessment. In my experience, there are communities that function well with less than 15% of the budget directed towards reserves, while most require a higher portion of the operating budget to be directed to the reserves.
I doubt that any association whose reserve study recommends a 1% cash flow threshold (rather than a 0% cash flow threshold) will have a recommended reserve contribution that equates to at least 15% of their annual budgeted assessment income. I doubt if many lending institutions are going to grant Fannie Mae or Freddie Mac based loans relying on a 1% cash flow minimum threshold, even if such recommended funding is not a baseline funding goal.
I doubt if lending institutions will grant Fannie Mae or Freddie Mac backed loans using the reserve study alternative if the recommended cash flow threshold funding goal is 1%. Not much difference between 1% and 0%.
I haven’t seen information indicating that threshold funding identified in an association’s reserve study will be acceptable. Perhaps you can point me in the right direction. My association is currently contributing 13% to reserves in 2026 and plans to increase to 15% in 2027, However, that’s not relevant to funding levels.
The reserve study alternative will be used for associations that don’t contribute to reserves at least 15% of their total budgeted annual operating assessment. Threshold funding in a reserve study will be acceptable if it is the highest recommended reserve contribution level in a reserve study that has been completed within the last 36 months. I am told that reserve studies that have a very minimum recommended contribution level (e.g., 1% threshold funding) generally won’t qualify for Freddie Mae or Freddie Mac backed loans (my contact has been speaking with Freddie Mae and Freddie Mac representatives regarding this issue.) There will be exceptions to this outcome, e.g., where an association’s reserves are currently very well funded.
The letter changes to per unit deductible max from $25k to $50k, but there is no mention of the 5% of TIV deductible max. Are we to assume that remains unchanged?
Morning. If we are adhering to our state requirement (every 5 years) and in year 4 in January 2027 but we fund at over 20% of operating budget and are fully funded at the highest recommended level, would a prospective buyer or owner refinancing still be denied a FMNA/FM loan come January 2027?