Wells: When the HOA impacts the home loan

Northern Colorado’s housing markets are seeing a favorable increase in condo and townhome resale inventory. In March, the number of condos and townhomes for sale grew by 33% in Fort Collins, 67% in Loveland, 26% in Windsor and 39% in Greeley. These properties have long served as a gateway to homeownership for first-time buyers, as they are often more affordable than single-family homes. However, a growing obstacle threatens this segment. Conventional financing is increasingly unavailable due to Fannie Mae requirements, which are often outside the control of individual owners.

Fannie Mae’s non-warrantable blacklist

Fannie Mae, a government-backed enterprise that purchases roughly 70% of U.S. mortgages, evaluates condos and townhomes with homeowners associations for loan eligibility. Properties that fail to meet certain standards may be denied. This can happen due to high insurance deductibles, low cash reserves, deferred maintenance, or a high number of rental units. These communities are placed on Fannie Mae’s non-warrantable “blacklist.”

This list is not publicly available but is used by lenders to determine whether a buyer can obtain a conventional mortgage. If a property is non-warrantable, conventional financing is not an option. Buyers must then turn to private loans, all-cash purchases, or FHA / VA loans. These alternatives can be more costly and reduce the number of potential buyers. As a result, many buyers walk away in search of homes that qualify for conventional financing.

Colorado currently ranks third in the nation for the number of ineligible condo and townhome communities. According to a report by Boston law firm Allcock & Marcus, shared with The Wall Street Journal, 210 communities in Colorado were identified as ineligible in February of 2025.

Why condos and townhomes are affected

Both condos and townhomes with HOAs or within planned unit developments, or PUDs, can face challenges meeting Fannie Mae’s criteria. Condos, which often include shared amenities, tend to face more hurdles. However, townhomes governed by HOAs are also at risk. Common disqualifying factors include the following:

• Insurance costs: Some HOAs facing rising premiums choose high-deductible insurance policies. If the deductible exceeds 5% of the total insurance coverage amount, the community becomes ineligible.

• Underfunded reserves: HOAs are required to allocate at least 10% of their budget to reserves. Older or financially strained communities may fall short of this requirement.

• Deferred maintenance: Unaddressed repairs, such as aging roofs or siding, can lead to rejection by Fannie Mae.

• Low owner-occupancy: If fewer than 50% of units are owner-occupied, financing options become limited or unavailable.

• Litigation: Active lawsuits, including construction defect cases, can disqualify a community from conventional financing.

These issues present serious challenges in markets where condos and townhomes play a crucial role in providing affordable housing. Properties that do not qualify tend to stay on the market longer, attract fewer buyers, and ultimately sell for less.

Impact on buyers and owners

For first-time buyers in Greeley, where housing affordability is a major draw, denial of financing can derail the path to homeownership. In Fort Collins, a competitive market with limited inventory, condos and townhomes that cannot be financed with a conventional loan contribute to stagnant sales despite appearing as active listings. Owners may experience extended time on market or failed contracts. In some cases, this can lead to financial losses and frustration. These risks matter in a region that relies on condos and townhomes to help close the housing gap.

Action steps for owners and buyers

Owners: Stay informed about the financial health of your HOA. Pay attention to insurance deductibles, reserve funding, and long-term maintenance planning. Many HOA boards try to keep dues low but may unknowingly make decisions that jeopardize the entire community’s eligibility for conventional financing. If your community is already on the ineligible list, work with the board to explore solutions. These might include securing compliant insurance, increasing reserve contributions, or addressing needed repairs.

Buyers: Ask your mortgage broker or banker early in the process whether the property you are considering qualifies for conventional financing. You can also ask your Realtor to check if any recent conventional loans have closed in the community, which can be a helpful indicator. Taking proactive steps can prevent last-minute surprises and save time and money.

Brandon Wells is president of The Group Inc. He can be reached at [email protected] or 970-420-6550.

Share on Facebook on LinkedIn