Understanding Ineligibility Risks for Condominium Projects Under Freddie Mac Guidelines

 Troy Tanzer

As lenders, developers, condominium trustees, and unit owners navigate today’s evolving lending landscape, one often-overlooked

concern is whether a condominium project will qualify for conventional financing supported by Freddie Mac or Fannie Mae. These government-sponsored enterprises (GSEs) do not make loans directly to homebuyers. GSEs purchase loans from lenders to replenish the lenders’ supply of capital so that they can make mortgage loans to other borrowers. In doing so, GSEs impose a set of stringent eligibility requirements. If a project fails to meet them, financing for buyers may be restricted or altogether unavailable, thereby diminishing marketability and property value.

 This article provides an overview of the types of condominium projects that are ineligible for sale to Freddie Mac, based on the criteria set forth in Section 5701.3 of Freddie Mac’s Single-Family Seller/Servicer Guide. While similar restrictions apply under Fannie Mae’s standards, our focus here is on Freddie Mac’s specific exclusions. It is critical for condominium boards, developers, and real estate professionals to review these criteria carefully and take proactive steps to ensure continued eligibility.

 Projects Lacking Ownership Interest in the Land

 Freddie Mac disqualifies projects where unit owners do not possess either an undivided ownership interest or a leasehold interest in the land on which the project is located. This issue often arises in projects where land ownership remains with the developer or a third-party entity post-construction.

Condominium Hotels and Transient Housing

Perhaps the most restrictive and nuanced category involves so-called "condo hotels" and transient use properties. Projects licensed or operated as hotels or motels, or that include hotel-like services such as mandatory rental pooling, room service, daily cleaning, or centralized reservation desks, are typically deemed ineligible. Freddie Mac also scrutinizes projects that include blackout periods or occupancy restrictions on personal use, shared revenue agreements, or HOAs that actively manage short-term rentals and collect taxes on behalf of owners.

Even if a project is not explicitly labeled a hotel, it may still be disqualified if it bears the hallmarks of transient housing. These include vacation rental licensing, short-term rental platforms managed by the HOA, or common spaces allocated to rental operators.

 

Other Disqualifying Project Structures

A range of structural and legal arrangements also render a project ineligible, including:

 

• Multi-unit ownership on a single deed
• Excessive commercial space

*A project in which more than 35% of the total above and below grade square footage of the project (or more than 35% of the total above and below grade square footage of the building in which the project is located) is used as commercial or non-residential space.

 

• Tenancy-in-common arrangements without exclusive ownership of individual units
• Timeshare models and segmented ownership periods
• Houseboat developments or floating dwellings
• Continuing Care Retirement Communities (CCRCs)

Each of these configurations departs from the traditional condominium ownership structure in ways that Freddie Mac deems too risky or administratively unmanageable.

 

Common Element Ownership and Shared Facilities

Unit owners must collectively possess sole ownership of all common elements, including amenities and shared infrastructure. Projects in which developers retain ownership interests in the common areas, or where those areas are subject to lease arrangements, are generally disqualified. However, certain shared use arrangements between multiple residential condominium projects may be permitted if they are limited to residential use and formalized through a clear agreement governing use, maintenance, and dispute resolution.

Pending Litigation and Structural Deficiencies

If a condominium is the subject of pending litigation or alternative dispute resolution proceedings that involve safety, habitability, or structural integrity concerns, the project is not eligible. Even disputes involving the project’s developer can trigger disqualification. Minor litigation may be allowed if it is covered by insurance and poses no material financial threat to the HOA, but this exception requires thorough documentation, including attorney letters and insurance verification.

Similarly, projects in need of “Critical Repairs” are ineligible unless and until all necessary repairs have been completed and confirmed through engineering reports or equivalent documentation. The presence of an evacuation order or unsafe building conditions also renders a project immediately ineligible.

 

Excessive Investor Ownership

Freddie Mac limits the number of units that a single entity or investor may own. For projects with 21 or more units, no more than 25% may be held by a single party. Exceptions may apply to transactions that actively reduce investor concentration, subject to other financial health criteria.

 

Manufactured Housing and Mandatory Membership Fees

Projects that include manufactured homes are typically ineligible unless they comply with specialized approval processes. Additionally, projects that impose mandatory dues or membership fees for access to recreational amenities—such as clubhouses or fitness centers—must meet strict criteria. Specifically, the amenities must be owned solely by the HOA and exclusively available to its members.

 

Key Takeaways for Developers and Condominium Associations

Freddie Mac’s exclusion criteria are extensive, but they are not insurmountable. In many cases, projects can be structured—or restructured—through amendment of governing documents or operational adjustments to maintain eligibility. Boards should conduct a periodic eligibility audit, especially before major renovations, leasing policy changes, or litigation.

An associate in the real estate and litigation departments of the Quincy and Boston-based firm of Moriarty Bielan & Malloy LLC, Troy handles a variety of real estate related matters, with an emphasis on zoning and land use.  Troy’s email address is ttanzer@mbmllc.com.