On March 18, 2026, Fannie Mae and Freddie Mac announced the biggest overhaul of their condominium lending rules in years. Some changes are already in effect. The one that will matter most to the most Chicago condo owners arrives in January: associations will need to budget at least 15% of their annual assessment income for reserves — up from 10% — or the building may no longer qualify for most conventional mortgages.
That affects nearly everyone with a stake in a condo building: owners who may see higher monthly assessments, sellers whose buyers need financing, and buyers who will face more scrutiny of the building, not just their own credit. Here's what's changing, when, and what to do about it.
Quick Answer
For mortgage applications dated on or after January 4, 2027, Fannie Mae requires a condo association's budget to allocate at least 15% of annual assessment income to replacement reserves, up from 10%. Freddie Mac has adopted a matching standard. An association can meet the requirement instead with a reserve study updated in the last three years, as long as its budget funds the study's highest recommended reserve contribution.
For owners, an underfunded association will likely need to raise assessments, by roughly 6% for a building now at 10% and more for one below it. For buyers using a conventional loan, a building that doesn't meet the rule may not qualify for Fannie or Freddie financing, which can mean a higher rate, a larger down payment, or a deal that falls apart.
What's Changing: The New Condo Lending Timeline
The changes come from Fannie Mae Lender Letter LL-2026-03 and Freddie Mac Bulletin 2026-C, both issued March 18, 2026. The key dates are tied to the date of the buyer's loan application, not the closing date:
Effective Date | Change |
|---|---|
March 18, 2026 | The 50% investor-concentration limit is removed for established projects. The waiver of project review expands to buildings with up to 10 units. |
July 1, 2026 | The master insurance policy's per-unit deductible is capped at $50,000. Buyers need an HO-6 policy that covers at least the master deductible. |
August 3, 2026 | Fannie Mae's Limited Review and Freddie Mac's Streamlined Review are retired, so most buildings over 10 units now need a Full Review. A reserve study used for approval must be funded at its highest recommended level, and "baseline" funding no longer counts. |
January 4, 2027 | The minimum reserve allocation rises from 10% to 15% of annual budgeted assessment income. |
The limited review that ended in August used to let many buyers putting 10% or more down skip a detailed look at the building's finances. With it gone, the 15% reserve test will apply to far more transactions than the old 10% test ever did.
What Are Condo Reserves, and Why Do Fannie and Freddie Care?
Reserves are the association's savings account for big, predictable expenses: roofs, tuckpointing, boilers, elevators, windows, porches, and parking structures. A healthy reserve fund lets a building pay for these when they come due. An underfunded one has two choices: put off the repair, or hit every owner with a special assessment.
Both outcomes matter to a lender. Deferred maintenance erodes the value of the collateral, and a surprise five-figure assessment can push an owner into default. Fannie Mae and Freddie Mac have pointed to underfunded reserves and sudden special assessments as the reason for the stricter standard.
How the 15% Rule Works
When a lender reviews a building, it looks at the association's current budget. An association can meet the reserve requirement in one of two ways:
- The 15% test. At least 15% of the annual budgeted assessment income is allocated to replacement reserves. For a building collecting $240,000 a year in assessments, that's $36,000 a year in reserve contributions instead of $24,000.
- The reserve study alternative. The association has a professional reserve study completed or updated within the past three years, and the current budget funds the study's highest recommended reserve contribution. Some studies offer a menu of funding options. Picking the lowest one, or a "baseline" plan that only keeps the account from hitting zero, doesn't qualify.
The test is about the budget, not just the balance in the reserve account. A building with a large reserve balance but a budget that contributes too little going forward can still fall short.
Good News for Chicago's Small Condo Buildings
Much of the North and Northwest Side's condo stock is in small buildings: converted two-flats, three-flats, six-flats, and courtyard buildings. The new rules expanded the waiver of project review to buildings with 10 or fewer units, and Freddie Mac has a comparable exemption. When a waiver applies, the lender doesn't do the full building review that the 15% test belongs to.
Eligibility depends on more than unit count, including whether the building is part of a master association or a multi-phase development, whether there are critical repairs, and the specific lender's policy. Many small self-managed associations also run very lean budgets with little in reserves, so a waiver isn't a reason to ignore reserves. It does mean small buildings are less likely to have deals derailed by this specific rule.
What the New Rule Means for Current Condo Owners
Will My Assessments Go Up?
If your association currently budgets less than 15% for reserves and doesn't have a qualifying reserve study, probably yes. Most boards are building 2027 budgets right now, so this is when decisions get made. Because the reserve requirement is a percentage of the total budget, the math is slightly more than you'd expect. Here's an example: a 24-unit building where the average assessment is $400 a month, and operating costs stay flat:
Current Reserve Allocation | Increase Needed to Reach 15% | Average Increase per Unit |
|---|---|---|
10% (the old minimum) | About 5.9% | About $24/month |
5% | About 11.8% | About $47/month |
Nothing budgeted for reserves | About 17.6% | About $71/month |
Illustrative only. Assumes operating expenses stay the same; insurance and utility increases would come on top of these figures.
An Illinois note: Under the Illinois Condominium Property Act, if a new budget would raise total assessments by more than 15% over the prior year, owners holding 20% of the votes can petition for a vote on it within 14 days of adoption. The budget stands unless a majority of all owners' votes reject it. Buildings with little or nothing in reserves are the ones that could cross that line, so boards should explain why the increase is needed before adopting the budget.
Why Higher Assessments Can Protect Your Home's Value
No one likes a higher monthly assessment. But the alternative can be worse. If your building doesn't meet Fannie and Freddie's standards, it becomes "non-warrantable," and most buyers relying on a conventional loan won't be able to buy your unit on standard terms. Fewer qualified buyers means longer market times and lower prices. In practice, the reserve rule ties every owner's resale value to the board's budget.
Owners in Illinois already have a statutory baseline: the Condominium Property Act requires association budgets to include reasonable reserves for capital expenditures and deferred maintenance. The new lending standard now gives a specific number to aim for.
What Condo Owners Should Do Now
- Look at your association's proposed 2027 budget. Find the reserve line and divide it by total assessment income. If it's under 15%, ask the board how it plans to comply.
- Ask whether the building has a current reserve study. If it's more than three years old, or the budget funds less than its highest recommendation, it won't satisfy the alternative.
- Push for a reserve study if there isn't one. It may justify a funding level different from 15%, and it gives the board a real plan instead of guesswork.
- If you plan to sell in 2027, confirm with the management company that the building will pass a lender's full review, and gather the budget, reserve study, insurance certificate, and recent minutes before you list.
What the New Rule Means for Condo Buyers Getting a Mortgage
If you're paying cash, the reserve rule doesn't block your purchase, though it's still a useful measure of a building's health. If you're financing with a conventional loan, the building now has to qualify along with you.
More Buildings Will Get a Full Review
Since August 3, most buildings with more than 10 units need a Full Review regardless of your down payment. Your lender will send the association a detailed questionnaire and look at the budget, reserves, master insurance, delinquencies, special assessments, litigation, and any critical repairs. That takes time, and a slow management company can delay closing. Expect this step on almost every financed condo purchase in a mid-size or large building.
What Happens If the Building Doesn't Qualify?
A building that fails the review is non-warrantable for Fannie Mae and Freddie Mac. You may still be able to buy, but your options narrow:
- Portfolio or non-warrantable loans. Some banks and credit unions keep loans on their own books rather than selling them to Fannie or Freddie. They often require a larger down payment, commonly 20% to 25% or more, and may charge a higher rate.
- FHA or VA loans. These programs run their own separate condo approval processes, which this announcement didn't change. Many buildings aren't on the FHA or VA approved lists, however.
- Cash. In a building with financing trouble, cash buyers have real leverage.
Timing Matters
The 15% standard applies to loan applications dated on or after January 4, 2027. A buyer who goes under contract and applies before then is reviewed under the 10% standard, though lenders can adopt new rules early, so confirm with yours. If you're shopping for a condo this fall, the remaining weeks of 2026 are a genuine window. If you're buying next year, budget extra time for the building review.
Why a Low Assessment Can Be a Red Flag
It's natural to favor a condo with low monthly dues. But unusually low assessments often mean the building isn't saving for the future. Under the new rules, that building may need to raise dues soon, may face a special assessment, or may not qualify for your loan at all. A slightly higher assessment in a well-funded building is often the better deal. If monthly cost is the concern, there are other levers — such as using a seller credit to buy down your mortgage rate.
Documents to Review Before You Make an Offer
- Current budget: is the reserve line at least 15% of assessment income?
- Reserve study: how old is it, and does the budget fund its highest recommendation?
- Most recent financial statements and the reserve account balance
- Special assessments, current or planned
- Master insurance policy, including the per-unit deductible ($50,000 maximum)
- Delinquency rate: how many owners are behind on assessments
- Pending litigation involving the association
- Board meeting minutes from the past year, which often reveal upcoming repairs
In Illinois, sellers must provide many of these documents under Section 22.1 of the Condominium Property Act. Your attorney can review them during the attorney review period, and we recommend asking your lender to start the condo questionnaire as early as possible.
What It Means If You're Selling a Condo
Most buyers finance, so your building's reserve funding is now part of your listing. A well-funded association with a current reserve study is a selling point worth advertising. If your building is short of 15%, find out before you list whether the board plans to fix it in the 2027 budget, and whether a reserve study could satisfy the alternative. Listing in a non-warrantable building narrows your buyer pool to cash buyers and portfolio lenders, which typically means a longer market time and less negotiating leverage.
For context on how quickly well-positioned homes are selling, see our Lincoln Park and Logan Square market reports, which include condos alongside single-family homes.
Frequently Asked Questions
When does the 15% condo reserve requirement take effect?
For Fannie Mae and Freddie Mac loans with application dates on or after January 4, 2027. Applications dated before then fall under the previous 10% standard, unless the lender adopts the new rule early.
Is the requirement 15% of the reserve balance or the budget?
The budget. At least 15% of the association's annual budgeted assessment income must be allocated to replacement reserves. The existing balance in the reserve account doesn't satisfy the test on its own.
Can a reserve study replace the 15% requirement?
Yes, if the study was completed or updated within the past three years and the association's budget funds the study's highest recommended reserve contribution. Baseline funding plans don't qualify.
Does the rule apply to small condo buildings?
The 15% test is part of the Full Review. Many buildings with 10 or fewer units qualify for a waiver of project review instead, though eligibility depends on factors beyond unit count and on the lender's policy.
Does it affect my existing mortgage?
No. The rule applies when a new loan is made — a purchase or a refinance — so it doesn't change an existing mortgage. It can, however, affect your ability to refinance or the financing available to whoever buys your unit.
What is a non-warrantable condo?
A condo in a building that doesn't meet Fannie Mae and Freddie Mac's project standards, so loans on its units can't be sold to them. Buyers can still purchase with cash, a portfolio loan, or, if the building is approved, an FHA or VA loan, but financing is usually harder and more expensive.
Buying or Selling a Condo in 2027?
The Camille Canales Group helps condo buyers and sellers across Chicago's North and Northwest Side understand how building finances affect financing, pricing, and timing. Whether you want to know if your building is ready for the new rules or which buildings make sense for your loan, we're happy to talk it through.
Based on Fannie Mae Lender Letter LL-2026-03 and Freddie Mac Bulletin 2026-C (March 18, 2026). Agency guidelines and individual lender requirements can change; confirm current requirements with your lender. Assessment examples are illustrative. This article is for general information and is not legal or financial advice; consult an Illinois real estate attorney about your association's obligations.
