Litigation and Special Assessments: When They Actually Sink a Condo Loan

Published September 21, 2026 · 5-minute read · By the CondoScores team at RentSpire

"The building is being sued" or "there's a special assessment" are two of the most common reasons buyers and boards assume a condo loan is dead on arrival. Neither one automatically is. Fannie Mae's Selling Guide draws careful lines around both, and most litigation and most special assessments turn out to be fine. Here's the actual test, straight from the current Guide.

The litigation rule: it's about safety, not just lawsuits

Fannie Mae's baseline rule is narrow, not blanket. A project becomes ineligible specifically when "the HOA or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project" (Fannie Mae Selling Guide B4-2.1-03, effective August 5, 2026). Notice the qualifier — the lawsuit has to relate to one of those four things. A dispute that doesn't touch safety, structure, habitability, or function isn't automatically disqualifying.

This rule doesn't just cover filed lawsuits either. If the association is in arbitration or mediation that's reasonably headed toward a formal suit, Fannie Mae says the same scrutiny applies: "If a lender discovers that a project is engaging in pre-litigation activities (such as, but not limited to, arbitration or mediation) that are reasonably expected to proceed to formal litigation; the lender must apply Fannie Mae's litigation policies" (Fannie Mae Selling Guide B4-2.1-03).

The "minor litigation" exceptions — this is where most cases land

Most active HOA litigation is routine — collections, minor disputes, insured claims — and Fannie Mae built specific carve-outs for exactly that. A project stays eligible if the litigation meets at least one of these tests:

• Non-monetary litigation, "including, but not limited to neighbor disputes or rights of quiet enjoyment"
• The insurance carrier has agreed to defend, "and the amount is covered by the HOA's or co-op corporation's insurance"
• The HOA is the one suing (plaintiff), and the lender determines the matter is minor "with an insignificant impact to the financial stability of the project"
• "The reasonably anticipated or known damages and legal expenses are not expected to exceed 10% of the project's funded reserves"
• The HOA is recovering costs for something already fixed, with "no anticipated material adverse impact to the HOA... if funds are not recovered"
• Litigation over "localized damage to a unit" that doesn't touch the whole project's safety or structure
• The HOA is the plaintiff in a foreclosure action or a suit to collect past-due assessments (Fannie Mae Selling Guide B4-2.1-03)

That last bullet matters more than boards realize — an association routinely suing delinquent owners for unpaid dues is normal governance, not a red flag, and it's explicitly named as a non-issue.

The 10%-of-reserves test is the one number worth memorizing. If a board is facing a lawsuit and can show the exposure — anticipated damages plus legal costs — is under 10% of the project's current funded reserve balance, that alone can qualify it as minor.

Two categories get tighter scrutiny even under the minor-litigation framework:

• Personal injury or death claims don't qualify as minor "unless" the claim amount is known or reasonably estimable, the insurance carrier has agreed to defend, and the anticipated damages are within the HOA's insurance coverage (Fannie Mae Selling Guide B4-2.1-03).
• Construction defect suits where the HOA is the plaintiff are presumed non-minor unless the HOA is recovering costs for issues already remediated and there's no material adverse impact if the money isn't recovered (Fannie Mae Selling Guide B4-2.1-03).

Whichever exception a lender relies on, paperwork is required: "The lender must obtain documentation to support its analysis that the litigation meets Fannie Mae's criteria for minor litigation as described above" (Fannie Mae Selling Guide B4-2.1-03). If your board is in litigation, having your attorney summarize the claim type, exposure estimate, and insurance coverage in a short letter is often what actually unblocks a loan file — not the litigation itself.

Special assessments: the real question is "what is it for"

A special assessment on its own doesn't make a project ineligible. What matters is whether it's tied to an unresolved critical repair. Fannie Mae defines a "Project in Need of Critical Repairs" as one with "any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment)" (Fannie Mae Selling Guide B4-2.1-03) — notice the parenthetical: a repair that's already being funded through an active special assessment is treated differently than one sitting unfunded.

For every special assessment, current or planned, Fannie Mae requires the lender to actually dig into it:

"Lenders must obtain and review the following information for each special assessment to determine if it addresses a critical repair: what is the purpose of the special assessment, when was the special assessment approved and is it planned (approved by the unit owners, but not yet initiated by the board) or already being executed, what was the original amount of the special assessment and the remaining amount to be collected, and when is the expected date the special assessment will be paid in full." (Fannie Mae Selling Guide B4-2.1-03)

The bottom line rule is simple: "If the special assessment is associated with a critical repair and the issue is not remediated, the project is ineligible" (Fannie Mae Selling Guide B4-2.1-03). Flip that around, and a special assessment for something routine — a roof replacement on a normal capital cycle, a lobby renovation, a reserve top-off — generally does not create an eligibility problem as long as it isn't masking an unresolved critical repair.

What boards should have ready

1. If you're in litigation: get a one-page attorney summary covering claim type, dollar exposure, and insurance coverage status. This is the exact information a lender needs to apply the minor-litigation exceptions, and it's faster than a lender guessing.
2. Know your funded reserve balance. The 10%-of-reserves threshold only works in your favor if you can document your actual reserve balance quickly — this is also the number examined separately under the 15% minimum reserve rule taking effect January 4, 2027.
3. If you have an active special assessment, document the four data points above — purpose, approval date and status, original and remaining amount, and expected payoff date — before a lender asks. This turns a multi-week back-and-forth into a same-day answer.
4. Separate "critical repair" special assessments from routine ones. A special assessment funding a life-safety or structural item needs to show the underlying repair is remediated, not just funded, to clear this test.
5. Routine collections litigation is not a red flag. If your only active suits are for delinquent assessments or foreclosure, that's explicitly carved out — don't let a buyer's lender treat it as a dealbreaker without pointing them to this exception.

Sources

• Fannie Mae. Selling Guide B4-2.1-03, Ineligible Projects (effective August 5, 2026). https://selling-guide.fanniemae.com/sel/b4-2.1-03/ineligible-projects