Can I Get a Mortgage on a Condo With a Pending HOA Lawsuit?

Sometimes yes — it depends on what the lawsuit is about. Fannie Mae, Freddie Mac, and FHA all draw a line between "ordinary" litigation (small-dollar slip-and-fall, routine collection actions, minor disputes) and "material adverse" litigation (construction-defect class actions, suits that could threaten the project's structural integrity, financial viability, or marketability). Ordinary litigation under Fannie's 2022 minor-litigation exception generally doesn't kill the file. A material lawsuit usually makes the project ineligible for agency or FHA financing — at which point the deal moves to a non-warrantable condo lender (portfolio or non-QM), with a higher rate, larger down payment, and tighter underwriting.

The handbook view (what the rules actually say)

Condo financing isn't just about the borrower — the project itself has to be eligible. Pending litigation is one of the standard project-eligibility blockers:

• Fannie Mae: A condo project is generally ineligible if the HOA or developer is a named party in litigation that involves the project's safety, structural soundness, functional use, or habitability — or that could materially affect the project's financial condition. Routine, small-dollar collection or slip-and-fall suits may qualify for the minor-litigation exception updated in 2022. (Source: Fannie Mae Selling Guide B4-2.1-03, Ineligible Projects, and B4-2.2 Project Eligibility. /* TODO: verify exact 2022 minor-litigation sub-cite */)
• Freddie Mac: Parallel rule — projects with material litigation that could affect the HOA's ability to operate or the project's marketability are ineligible; routine matters are not automatically disqualifying. (Source: Freddie Mac Single-Family Seller/Servicer Guide, Chapter 5701 — Condominium Project Eligibility.)
• FHA: For HUD-approved condo projects, pending litigation involving the project must be reviewed; suits that threaten the project's financial stability, safety, or habitability render the project ineligible until resolved. FHA also distinguishes a fully approved project from a single-unit approval; a CLOSED status (project approval expired, suspended, or withdrawn) shuts off FHA financing entirely. (Source: HUD Handbook 4000.1, II.A.8.p — Condominium Project Approval.)
• VA: The project must appear on VA's approved condo list. VA applies a similar material-vs-routine litigation test during project approval and at loan-level review. (Source: VA Lender's Handbook, Pamphlet 26-7, Chapter 16 — Condominiums.)

The plain-English translation

Two questions decide everything: what is the lawsuit actually about, and how big is the dollar exposure relative to the HOA's reserves and insurance.

• Likely fine (ordinary litigation): a slip-and-fall in the lobby covered by HOA insurance, a routine assessment-collection suit against a delinquent owner, a minor contract dispute with a vendor. The suit is bounded, insured, and doesn't threaten the building.
• Likely a problem (material adverse litigation): a construction-defect class action against the developer/HOA, a suit involving water intrusion or facade failure, anything that could force a special assessment large enough to destabilize owners, or anything alleging structural defect.
• The HOA questionnaire is where it gets decided. Every condo loan requires the HOA to fill out a project-eligibility questionnaire. The litigation questions are the ones that most often kill (or save) a file. If the HOA marks the suit as covered by insurance with no material exposure, that's often enough; if they can't answer cleanly, the underwriter will press harder.
• FHA "CLOSED" is its own problem. Even with no litigation, if the project's FHA approval has expired or been withdrawn (CLOSED status on the HUD condo list), FHA financing is off the table until the project is re-certified. That's often a months-long process.

Lender overlays — where the rules get tighter

Beyond the handbook minimums, retail lenders frequently impose tighter rules on condo litigation. Two lenders looking at the same project can give opposite answers:

• Blanket no-litigation overlays: Some retail lenders simply will not finance any condo in any pending litigation, even when the agency rule clearly allows the minor-litigation exception. The file gets declined at desk-review with no project-level analysis.
• Dollar-threshold overlays: Other lenders apply a dollar cap (for example, claim amounts under a certain figure relative to HOA reserves are okay). That figure varies by lender; the handbook itself doesn't set a specific dollar threshold for the exception.
• Insurance-coverage overlays: Some lenders accept the file if the HOA certifies the litigation is fully covered by insurance with no anticipated assessment; others want the insurer's coverage letter directly in the file.
• Non-warrantable workaround: When the project is ineligible for agency or FHA, portfolio and non-QM lenders will often still finance — typically with 10–25% down, a higher rate, and tighter reserve requirements. Most retail lenders don't offer non-QM condo programs at all. As an independent broker we have wholesale access to non-warrantable channels, so a no from the agency side isn't the end of the conversation.

Routine vs material — quick test

The table is a guideline, not a promise. The actual classification depends on the complaint, the HOA's response, insurance coverage, and the lender's overlay. The right move is to read the complaint, fill out the HOA questionnaire carefully, and price the loan in both warrantable and non-warrantable channels.

Which lenders we actually use for this scenario

There are really two channels for condo loans, and the dividing line is whether the project is “warrantable” — meaning it meets Fannie Mae / Freddie Mac / FHA / VA project standards, including the litigation rules in Fannie's B4-2.1 and HUD 4000.1 Part II.A.8.

If the lawsuit is what the agencies call minor litigation — a slip-and-fall under a certain dollar threshold, a routine collection action against a delinquent unit owner, a contract dispute with a vendor that's well-covered by HOA insurance — most agency lenders will clear the project. Fannie loosened this in 2022 specifically to stop killing deals over nuisance suits. For these I'll use a standard agency wholesale lender, same as any other condo.

If the suit is what they call material adverse — structural defects, construction-defect litigation against the developer, a class action involving the building envelope, anything where the HOA is the defendant and the damages claimed are large or uncapped by insurance — agency is dead. Doesn't matter how strong the borrower is. The project itself is ineligible.

That's where the broker channel earns its keep. I keep relationships with non-QM and portfolio lenders who'll write loans on non-warrantable condos — projects with pending material litigation, high investor concentration, commercial space above the agency limits, single-entity ownership issues, you name it. The rate is higher, the down payment is usually larger (often 20-25% minimum), and the loan doesn't get sold to Fannie or Freddie — the lender either keeps it or sells it into a private label securitization. But the loan closes.

Real-world cases

I've seen this pattern over and over: borrower finds a unit they love, goes under contract, then the HOA questionnaire comes back disclosing litigation and the retail lender ghosts them. They show up at my office two weeks before the contract deadline asking if there's anything I can do. (Illustrative composite — details vary; pattern is consistent.)

Sometimes the answer is yes — the litigation is the kind of nuisance suit Fannie's 2022 update was designed to clear, and the original lender just didn't know how to read the new rules or didn't want to fight their own underwriting desk. In those cases I'll re-shop the file to a wholesale lender whose underwriters actually work the updated litigation guidance, and we close on agency terms.

Other times the suit is genuinely material — construction defect cases on newer high-rises in Denver are a recurring example I've worked through — and there's no agency path. Then we have an honest conversation about whether the borrower wants to pivot to a non-QM portfolio product (higher rate, bigger down, but the loan closes), or walk and find a different unit in a different project. Both are legitimate answers depending on the borrower's situation and how badly they want that specific unit.

How the big retail lenders typically handle this

The big retail shops are built for volume on clean files. Their condo desks tend to take the most conservative possible read of any litigation disclosure — when in doubt, decline. That's not a knock on them; it's a rational business decision when you're running thousands of files a week and the marginal litigation review costs you more than the loan earns.

What it means for the borrower is that retail will often tell you the project is non-warrantable when an experienced broker reading the same file would clear it under Fannie's minor-litigation carve-out. And when retail does correctly identify a material-adverse suit, they don't have a non-QM portfolio shelf to pivot you to — they just hand back your earnest money and move on.

A broker has both reads available: the agency-clearance read for marginal-litigation projects, and the non-warrantable-portfolio path for genuinely ineligible ones. That optionality is most of the value proposition on a condo with any litigation disclosure at all.