The Growing Condominium Crisis: New Financing Rules and What Owners Need to Know for 2027

Condominium owners across the country are facing increasing challenges. Aging buildings, rising maintenance costs, inadequate reserve funds, and stricter mortgage lending requirements are creating financial concerns for condominium associations and individual owners.

For years, some condominium associations have postponed major repairs to avoid raising maintenance fees or imposing special assessments. While delaying repairs may provide short-term financial relief, the problems do not go away. In many cases, they become more expensive to correct.

Now, changes to condominium financing requirements are bringing greater attention to these issues.

Beginning in 2027, new reserve funding requirements from Fannie Mae and Freddie Mac could make it more difficult for some condominium buyers to obtain conventional financing.

As a building expert with decades of experience in construction, inspections, and forensic engineering, I believe condominium owners and associations need to understand how building maintenance, reserve funding, and financing are connected.

The Problem With Aging Condominium Buildings

Many condominium buildings throughout the United States, including Hawaii, are reaching an age when major repairs and replacements become necessary.

Concrete deterioration, corroded reinforcing steel, water intrusion, roofing problems, plumbing failures, and aging mechanical systems are some of the conditions that condominium associations may encounter.

These problems are not unusual in older buildings. However, the cost of repairs can increase significantly when maintenance is neglected.

For example, a small water leak may appear to be a minor maintenance issue. However, if the water continues to penetrate the building, it can eventually cause corrosion, concrete deterioration, and damage to other building components. What could have been a relatively simple repair may develop into a much larger and more expensive project.

In Hawaii, where many condominium buildings are exposed to salt air, humidity, and heavy rainfall, preventive maintenance and regular inspections are especially important. The longer necessary repairs are delayed, the greater the potential for additional damage and increased repair costs.

Why Condominium Reserve Funds Matter

A condominium association is responsible for maintaining the building's common elements and shared systems.

To meet these responsibilities, associations generally collect maintenance fees from unit owners. A portion of these funds should be allocated to reserves for future major repairs and replacements.

Reserve funds help associations prepare for expenses such as:

• Roof replacement and waterproofing repairs

• Concrete restoration and structural repairs

• Plumbing and piping replacement

• Elevator modernization

• Exterior painting and building maintenance

• Replacement of major mechanical and electrical equipment

Problems develop when an association does not set aside enough money to cover these anticipated expenses.

When major repairs become necessary and adequate funds are unavailable, the association may need to increase maintenance fees, impose special assessments, or obtain financing.

Depending on the extent of the work, individual condominium owners could face substantial unexpected expenses.

A reserve study can help identify building components that will require future repair or replacement, estimate their remaining useful life, and establish anticipated costs.

However, a reserve study must be based on reasonable assumptions and reliable information about the building's actual condition.

If the building has significant deterioration that has not been properly evaluated, the estimated reserve requirements may not reflect the true cost of necessary repairs.

New Condominium Financing Requirements for 2027

Condominium associations now have another reason to pay close attention to reserve funding.

Fannie Mae and Freddie Mac have introduced changes to their condominium project eligibility requirements.

These organizations purchase mortgages from lenders, and their requirements influence which condominium units qualify for many conventional mortgage loans. One significant change involves the amount of money condominium associations must allocate to replacement reserves. Under the applicable Full Review requirements, the minimum annual reserve allocation is increasing from 10% to 15% of the association's annual budgeted assessment income.

The new 15% requirement takes effect for applicable mortgage loan applications dated January 4, 2027, or later.

To understand how this works, consider a condominium association with $1 million in annual assessment income. Under the previous 10% requirement, the association would generally need to allocate at least $100,000 annually to replacement reserves. Under the new 15% requirement, that amount increases to $150,000. That represents an additional $50,000 in annual reserve funding.

For condominium associations already struggling with rising expenses, meeting the new requirement could create additional financial pressure. It is important to understand that the 15% requirement is a mortgage project eligibility standard. It does not automatically require every condominium association to increase its reserve contributions to 15%.

Certain projects qualify for exemptions or alternative review procedures. Lenders may also be able to use an acceptable reserve study to establish adequate funding under the applicable guidelines.

Nevertheless, condominium associations should understand how their budgets and reserve funding could affect owners who want to sell or refinance their units.

How Building Conditions Can Affect Condominium Financing

In the past, condominium buyers often focused primarily on the condition of the individual unit, its location, amenities, and purchase price.

Today, the overall condition and financial health of the condominium project deserve greater attention.

Lenders reviewing a condominium project may examine several factors, including:

• The association's operating budget and reserve funding

• The condition of the building and its common elements

• Outstanding structural or safety concerns

• Deferred maintenance and necessary repairs

• Existing or proposed special assessments

• Insurance coverage and deductibles

• Delinquent association assessments

If a condominium project does not satisfy applicable financing requirements, some buyers may have difficulty obtaining a conventional mortgage. This can affect both buyers and existing owners.

A prospective buyer may qualify financially for a mortgage, but the condominium project itself may not meet the lender's requirements. Likewise, an owner who wants to refinance could encounter difficulties because of issues involving the building or condominium association.

This does not necessarily mean the condominium cannot be sold or financed through another lending program. However, fewer financing options can make transactions more complicated and potentially affect marketability.

The important point is that a condominium's physical condition and financial preparedness can influence its financing eligibility.

Why Deferred Maintenance Can Become a Financial Problem

Deferred maintenance is not simply a matter of postponing construction work. It can eventually create problems that affect the entire condominium association. Consider a building where concrete spalling has been observed on balconies or exterior walls. Initially, the association may postpone repairs because of budget limitations.

Over time, continued exposure to moisture can contribute to further corrosion of reinforcing steel and additional concrete deterioration. Eventually, the association may need a more extensive repair program involving engineering evaluations, construction work, permits, and possibly temporary restrictions on portions of the building.

If the association has inadequate reserves, owners may face a substantial special assessment. At the same time, unresolved critical repairs or unsafe conditions may affect condominium financing eligibility. The association is then dealing with two problems: the cost of correcting the building deficiencies and the potential financial consequences for unit owners.

From my experience, identifying building problems early and developing a realistic repair plan is important. Regular inspections, proper maintenance, and timely repairs can help reduce the likelihood of more serious problems developing.

What Condominium Buyers Should Check Before Purchasing

Anyone considering purchasing a condominium should look beyond the appearance of the unit. A newly renovated kitchen or bathroom does not necessarily mean the building itself is in good condition.

Before purchasing, buyers should consider requesting and reviewing:

1. The condominium association's financial statements and budget
Determine whether the association has sufficient operating funds and an appropriate reserve funding plan.

2. The latest reserve study
Review anticipated repair and replacement costs and whether the association is following the recommended funding plan.

3. Building inspection and engineering reports
Find out whether significant structural deficiencies, water intrusion problems, or other building concerns have been identified.

4. Information about special assessments
Determine whether special assessments have been approved, are being considered, or may be needed for anticipated repairs.

5. Maintenance and repair records
Look for major repairs that have been completed and projects that remain outstanding.

6. Condominium financing eligibility
Ask the mortgage lender whether the condominium project meets the applicable lending requirements, particularly if the loan application will be submitted in 2027.

These documents can provide valuable information about the condition of the building and the association's ability to maintain it.

When significant building deficiencies are identified, a qualified building professional may be needed to evaluate the conditions and explain their potential implications.

What Condominium Associations Should Do Now

With stricter financing requirements and rising construction costs, condominium associations should take a proactive approach to building maintenance and financial planning.

I recommend that condominium boards and property managers consider the following:

• Conduct regular building inspections. Identify deterioration, water intrusion, structural concerns, and other conditions before they become more serious.

• Review existing reserve studies. Make sure anticipated repair and replacement costs reflect the building's current condition and realistic construction costs.

• Address deferred maintenance. Develop a reasonable plan and schedule for necessary repairs instead of allowing problems to continue indefinitely.

• Maintain accurate records. Keep building inspection reports, engineering evaluations, maintenance records, repair documentation, and financial information organized and accessible.

• Review financing requirements. Consult the association's financial advisers and appropriate lending professionals to understand how the updated condominium project requirements may affect owners.

• Communicate with unit owners. Explain anticipated repairs, reserve funding needs, and possible special assessments so owners can prepare financially.

A condominium association should not wait until a major building problem occurs or an owner's mortgage application is rejected before addressing these issues.

What This Means for Hawaii Condominium Owners

Hawaii has many aging condominium buildings, particularly in Honolulu and other established urban areas.

Some buildings have already undergone extensive concrete restoration, plumbing replacement, waterproofing repairs, and other major improvements.

Others may still be facing significant maintenance and repair requirements.

Hawaii condominium associations must also comply with applicable state laws governing reserves, maintenance, and association responsibilities. These state requirements are separate from the mortgage eligibility standards established by Fannie Mae and Freddie Mac.

For Hawaii condominium owners, the upcoming financing changes are another reason to pay attention to the condition of their buildings and the financial planning of their associations.

Owners should understand that the value and marketability of their units can be influenced by factors beyond the interior condition of their individual properties.

The maintenance of the entire building matters.

Final Thoughts

The growing condominium crisis is a reminder that building maintenance and financial planning go hand in hand.

A condominium association may be able to postpone repairs for a period of time, but deterioration does not stop simply because the work has been delayed.

Eventually, necessary repairs must be addressed, and the cost is generally borne by the condominium owners.

With new financing requirements taking effect in 2027, condominium associations have additional reasons to maintain their buildings properly, evaluate reserve funding, and address outstanding deficiencies.

My advice to condominium owners and associations is straightforward: Know the condition of your building, understand the repairs that are needed, and plan for them before they become major problems.

Proper inspections, preventive maintenance, and realistic repair planning can help protect the building, reduce unexpected expenses, and preserve property values.

Lance Luke

National Building Expert

Building Consultant & Construction Expert

Phone: (808) 422-2132

Email: lanceluke@hawaiibuildingexpert.com

Website: hawaiibuildingexpert.com

Reach out anytime, we’re here to help.

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