Fannie Mae 2026 Condo Rules: Michigan Board Action Plan

Quick Answer

On March 18, 2026, Fannie Mae issued Lender Letter LL-2026-03, which changes the project standards and insurance rules lenders must apply when a buyer or refinancer uses a conventional loan on a condominium unit. The headline change for boards is reserves: the minimum replacement reserve allocation rises from 10 percent to 15 percent of the annual budgeted income assessment for loan applications dated on or after January 4, 2027. This is a lender requirement, not a Michigan statute, but it directly affects whether your unit owners can sell or refinance with conventional financing.

Why This Matters for a Michigan Association

Michigan's Condominium Act requires every association to maintain a reserve fund for major repairs and replacement of common elements, and it allows the state administrator to set minimum reserve standards by rule. See MCL 559.205. An association can satisfy state law and still fail a lender's project review. When that happens, owners lose access to conventional mortgages, which narrows the buyer pool and can depress values.

Reserve Changes

• 15 percent minimum. Fannie Mae raised the reserve allocation for capital expenditures and deferred maintenance from a minimum of 10 percent to a minimum of 15 percent of the annual budgeted income assessment. Lenders must apply it to Full Review loans with applications dated on or after January 4, 2027.
• Reserve studies carry more weight. If an association relies on a reserve study instead of the percentage test, the lender must verify the budget includes the highest recommended reserve allocation in the study.
• Baseline funding is out. Lenders may no longer accept the baseline funding method, which lets the reserve cash balance approach but never fall below zero. This applies to applications dated on or after August 3, 2026.

Boards setting a 2027 budget should price the 15 percent test now. If your current allocation is near 10 percent, closing the gap may require a phased assessment increase rather than a single-year jump. See our guides to Michigan reserve fund law and budget season, and track the pending HB 5784 reserve study bill.

Master Insurance Changes

• Coverage amount. The master policy must cover at least 100 percent of the estimated replacement cost of the project improvements. A lender may document that with guaranteed or extended replacement cost coverage, an insurer estimate, the project's insurance risk appraisal, or a statement from the insurer or another qualified professional.
• Roofs. Roofs must be insured, but they no longer have to be insured on a replacement cost basis. Other building components still must be covered on a replacement cost basis.
• Inflation guard. The requirement for inflation guard coverage is retired.
• Per-unit deductible cap. The maximum per-unit deductible on the master policy is 50,000 dollars. Lenders must apply this to loans with application dates on or after July 1, 2026.

The roof change can lower premiums, but a policy that pays actual cash value on a roof also leaves the association exposed to depreciation if the roof is damaged. Boards should discuss that tradeoff with their agent and model the cost of a roof claim, not just the premium savings.

What Owners Must Carry When There Is a Per-Unit Deductible

If the master policy has a per-unit deductible, the borrower must carry a unit owner policy (commonly called HO-6). The policy must provide at least the greater of the amount needed to restore any interior or improvements not covered by the master policy, or the per-unit deductible. It must cover required perils that the deductible applies to and must pay on a replacement cost basis. The maximum deductible on the owner's own policy is the greater of 5 percent of the coverage amount or 2,500 dollars.

Associations that raise their master deductible to save money should tell owners in writing, because many owners do not realize their own policy now has to cover that amount.

Other Project Standard Changes

• Limited Review retired. Established projects must use Full Review (or a Waiver of Project Review where it applies) for applications dated on or after August 3, 2026.
• Waiver of Project Review expanded. It now covers new and established projects with ten or fewer units; projects of five to ten units must not be part of a master association or larger development.
• Investor concentration limit retired. The 50 percent investment property concentration limit for established projects under Full Review is gone.

Board Action Checklist

• Calculate your reserve allocation as a percentage of annual budgeted income assessments and compare it to 15 percent.
• If you rely on a reserve study, confirm the budget funds the study's highest recommended annual amount, and update the study if it is more than a few years old.
• Ask your insurance agent to document the replacement cost estimate and explain how your roof is covered.
• Review the master policy deductible against the 50,000 dollar per-unit cap, and notify owners if it changes.
• Keep budgets, reserve studies, insurance certificates and meeting minutes organized so a lender questionnaire can be completed quickly.

How APM Helps

APM prepares budgets with reserve targets, coordinates reserve studies and bids, and keeps records ready for lender and title requests. If you want a second set of eyes on your 2027 budget, see the Michigan resources page or contact us.

Sources: Fannie Mae Lender Letter LL-2026-03 (March 18, 2026), and MCL 559.205. Fannie Mae and Freddie Mac may issue further guidance, and individual lenders can apply stricter overlays. This article is general information for community association boards, not legal or insurance advice; confirm details with your attorney, insurance agent and lender. Last verified October 24, 2026.