New Fannie Mae and Freddie Mac Rules Change Chicago Condo Buying

If you own a condo in Chicago, or you're planning to buy one, condo financing rules have changed. New Fannie Mae and Freddie Mac guidelines are changing how lenders evaluate condo buildings for conventional loans. The review can involve project finances, reserves, maintenance history, and other building documents. Some transactions may take longer, while others may become difficult to finance.

The Limited-Review Loophole Just Closed

Before August 4th, lenders could approve some condo purchases through a streamlined review process. That option is no longer available for certain conventional condo loans under the new guidelines. Some condo projects can still qualify for project-review waivers based on their characteristics.

For projects requiring Full Review, lenders must examine the association's finances and other documentation. Budgets and replacement accounts will face greater scrutiny. The reserve threshold is rising as well, and associations will feel the difference. Associations previously needed to allocate at least 10% of annual assessment income to reserves. Beginning next year, that minimum climbs to 15%. 

If the project does not meet the required reserve allocation, a lender may rely on a qualifying reserve study. The assessment covers major common-area components, their condition, useful life, and projected repair or replacement costs. If a lender requests one during the transaction, the additional review can slow the deal and create another opportunity for a buyer to reconsider.

These requirements reflect recent Fannie Mae Selling Guide changes to condo project review. The changes eliminate some streamlined review options and put more emphasis on project-level documentation.

Surfside Changed How Lenders See Condo Reserves

The 2021 Surfside condominium collapse in Florida changed how the industry viewed condo reserves and deferred maintenance. The collapse exposed the consequences of serious structural deterioration, deferred maintenance, and concerns about funding major repairs. Regulatory responses have developed in stages, with the latest lending changes adding another layer of scrutiny.

State law already plays a role, but it does not set the same percentage threshold. The Illinois Condominium Property Act requires budgets to provide reasonable reserves for capital expenditures and deferred maintenance. It does not establish a specific percentage floor. The new Fannie Mae and Freddie Mac requirements add separate standards for condo projects seeking conventional financing.

Mario Greco brings a specific vantage point to this issue. He has closed condo deals in buildings across Chicago for more than two decades. In his view, reserve studies are the provision most likely to create friction at the deal level.

"The association had to show a budget line item of 10% of the annual income going into a reserve. That's going up to 15% come the new year. If the amount isn't enough, or the lender deems it not enough for what may be coming down the pike, they will require a reserve study. A lender will look at that and say, there's a hundred grand worth of work coming down the pike, and they have eight grand in reserve. That's going to crater a lot of deals." 

— Mario Greco, Founder, The MG Group at Compass

A Reserve Shortfall Can Stall Your Deal

A buyer finds a condo, makes an offer, goes under contract, and submits a loan application. The lender reviews the association documents and finds that its budget does not meet the applicable reserve requirement. Additional documentation, including a reserve study, may then enter the review.

The lender may flag the project for further review while the buyer starts asking questions. The transaction can slow as the association, lender, and buyer work through the issue.

The association may respond by increasing assessments or otherwise strengthening its reserve funding. Additional documentation can still extend the timeline and complicate the buyer's financing. A buyer who was ready to close may start wondering whether the building is worth the trouble.

The tighter requirements could catch some sellers off guard. That could be especially challenging for older Chicago buildings with limited reserve funding.

Not sure how the new requirements could affect your building? Talk with the MG Group team before you list or go under contract. A short conversation now can help identify potential issues before they affect the transaction.

Cash Buyers Lose the Lender's Safety Net 

The Fannie Mae and Freddie Mac requirements apply to conventional mortgage financing. A cash buyer has no lender requiring those documents as a condition of financing.

A careful cash buyer may still want much of the same information a lender would request, and possibly more. That process creates a structured checkpoint that can give a financed buyer added confidence once cleared. A cash buyer without that outside validation may uncover the same concerns and pull back entirely.

"A buyer who's coming in with cash usually wants to see all of this stuff, because they want to make sure they're not buying into a ticking time bomb. Not having a lender won't save a deal from cratering. A building that's not healthy can still fall apart. A buyer paying cash might say, 'I'm putting all my life savings down here. This building doesn't seem totally secure. I'm going to pull out.' Versus someone who's borrowing might say, 'I'm putting 20% down. If the bank's comfortable, let's move forward.'" 

— Mario Greco, Founder, The MG Group at Compass

Sellers Should Review the Building Before Listing

Sellers should review their building's reserve position before going under contract, not after. Once a lender identifies a potential reserve issue, the seller has less control over the timeline. The buyer gets nervous, attorneys get involved, and a clean closing can turn into a negotiation over whether the deal still works.

A better starting point is to request the association's most recent budget and reserve balance before listing. If the budget falls short of the applicable reserve requirement, discuss the issue with the board before listing. The goal is to understand what additional documentation or funding changes may be needed.

Illinois law requires condo sellers to provide buyers with specific association and unit information under Section 22.1. The required information can include pending or anticipated special assessments, association finances, lawsuits, violations, and other material matters. A seller who lists without reviewing it first is walking into the deal blind.

Reserve review isn't the only paperwork issue that can stall a Chicago condo sale. Association documentation delays can arise well before a lender reviews the building's reserves. Getting the association's records in order early can keep small paperwork gaps from becoming closing-day problems.

The Long-Term Impact on Chicago Condos

The near-term friction is real, but stronger reserve practices could benefit buildings over time. The new requirements put greater emphasis on reserve funding and building condition. Over time, that pressure could encourage better maintenance and documentation across Chicago's condo stock. Deferred maintenance may be identified earlier, before problems become more expensive to address.

For buyers, the additional scrutiny can provide another layer of protection. A qualifying reserve study can show the building's major repair needs, projected costs, and reserve funding.

Chicago's condo market continues to face limited inventory, according to recent market data. Buildings with healthy reserves may have an easier time attracting financed buyers in that environment. Buildings with weaker reserves may become harder to sell as financing reviews create additional questions or delays.

Common Questions About Chicago's New Condo Reserve Rules

What are the new Fannie Mae and Freddie Mac condo reserve requirements?

Beginning in the new year, the required reserve allocation is scheduled to increase from 10% to 15% of annual assessment income. Lenders may also require more extensive project documentation, depending on the applicable review requirements. Certain condo projects remain eligible for project-review waivers.

Will these new condo reserve requirements affect deals already under contract in Chicago?

Yes, changes to project-review requirements can affect a transaction already under contract. The applicable standards depend on the loan and project circumstances. Buyers and sellers who did not anticipate additional review may face delays or financing complications.

How do I find out if a Chicago condo building meets the new reserve threshold?

Request the association's current operating budget and reserve fund balance before you make an offer. Illinois law also requires sellers to provide specific association and unit information under Section 22.1, including certain assessment and financial information. Your attorney and agent can help identify potential issues during the review period, before they create financing problems. That same period also gives Chicago buyers a way to compete without gambling their earnest money.

What happens if a condo association refuses to provide a reserve study?

If a lender requires documentation that the association cannot provide, the project may not qualify for that conventional loan. The buyer may need additional documentation, a different financing option, or a different property.

Can a condo association raise its reserve contribution to meet the new threshold before a sale closes?

Yes, an association may increase its reserve contribution through its budget process. However, the change may not resolve a financing issue immediately. Sellers should not count on a quick fix once a deal is already under contract.

Are older Chicago condo buildings more at risk under the new rules?

Older buildings may face greater challenges because major systems can require more frequent repairs or replacement. Limited reserve funding can add another concern during project review. However, building age alone does not determine whether a condo project meets the applicable lending requirements.

What is the difference between a condo reserve fund and a special assessment?

A reserve fund is money an association sets aside for anticipated major repairs and replacements. A special assessment is an additional charge imposed on unit owners to fund a specific expense outside regular assessments. Lenders may review both as part of the project's financial and eligibility review. Limited reserves can increase the risk of future special assessments, while certain pending assessments can affect conventional financing eligibility.

Run the Numbers Before You List or Buy

A condo's reserve position can now have a bigger impact on the transaction than many buyers and sellers expect. Reviewing the numbers early can uncover potential issues before they create financing delays or complicate a deal.

Want a clearer picture before you list or make an offer? Connect with the MG Group for a closer look at your building's financials and potential concerns. Mario Greco and his team have closed condo transactions across Chicago and worked through multiple market cycles.