A South Dakota condo budget now has to clear a 15% reserve line
A South Dakota condo budget now has to clear a 15% reserve line
2026-09-19 · South Dakota · Compliance
Two documents issued on the same day in March 2026 changed condominium lending more than anything since Surfside, and the deadlines land inside the budget a South Dakota board is writing right now. Fannie Mae Lender Letter LL-2026-03 and Freddie Mac Guide Bulletin 2026-C, both dated March 18, 2026, move in alignment and were made in consultation with FHFA.12
Neither is a statute, and no South Dakota law requires a condominium association to do any of it. What they control is whether a unit in the project can be financed with a conventional loan — which in practice decides whether it can be sold at all.
The dates
The changes phase in, and the phasing is the operational story:
Immediately, from March 18, 2026: the master-policy roof carve-out, the retirement of inflation guard, and expanded waiver of project review for projects of ten units or fewer.
Loan applications on or after July 1, 2026: the $50,000 per-unit master deductible cap.
Loan applications on or after August 3, 2026: Limited Review (Fannie) and Streamlined Review (Freddie) retired; enhanced reserve-study rules.
Loan applications on or after January 4, 2027: the reserve allocation minimum rises from 10% to 15%.
The first three have already taken effect. The fourth is the one still ahead, and it falls on budgets adopted this autumn.
Reserves: 15%, and the baseline method is gone
Fannie's language is direct: “We are revising our reserve allocation requirement for capital expenditures and deferred maintenance from a minimum of 10% to a minimum of 15% of the annual budgeted income assessment.”
The alternative to the percentage test has been narrowed at the same time. A reserve study can still be used, but: “Lenders are no longer permitted to use the baseline funding method which is the option that allows the reserve cash balance to approach but never fall below zero,” and lenders “must verify the project's budget includes the highest recommended reserve allocation amount in the reserve study to adequately cover the costs identified.”
Freddie states the same requirement in its own words: the budget “must include the highest recommended reserve allocation amount in the reserve study,” and that amount “must not be based on a baseline funding method — where the reserve cash balance approaches but never falls below zero.”
Both letters state the reasoning openly: “we have seen a correlation between condo projects with underfunded reserves for capital expenditures and those in need of critical repairs.”
South Dakota has no statutory reserve mandate at all — our reserve studies page covers what the Condominium Act does and does not require. For a project whose units are financed conventionally, the secondary market is now the only floor there is, and it just rose by half.
The deductible cap is the item most likely to bite in this state
Fannie: “the maximum allowable per unit deductible for all required property insurance perils covered by a master property insurance policy is $50,000 per unit.”
Freddie retired its old formula outright: “The maximum deductible requirement of 5% per unit, associated calculation examples and limitation to use the HO-6 coverage ‘cure’ only when the per unit deductible peril is specific to a geographic area is being retired. If the master property insurance policy includes a per unit deductible, the deductible now may not exceed $50,000 per unit.” A per-occurrence ceiling survives: deductibles “may not exceed 5% of the limit maintained for building(s) coverage per occurrence.”
South Dakota is a severe-hail state, and per-unit wind and hail deductibles here are written in percentages that on a large building can carry past $50,000. A master policy that crosses that line makes the project's units ineligible on applications dated July 1, 2026 forward — a renewal decision with a resale consequence attached. Our insurance requirements page covers the master-policy structure this sits on.
Roofs came out of replacement cost, and inflation guard is gone
Fannie: “The master property insurance policy must provide coverage on a replacement cost basis, with the exception of roofs. NOTE: Roofs must be insured, but do not have to be insured on a replacement cost basis.” And: “we are retiring the requirement that project developments have inflation guard coverage.” Freddie: “The inflation guard requirement has been retired in its entirety.”
Those two look like relief and function differently in hail country. What the roof carve-out does is permit a carrier to quote an actual-cash-value roof and remain compliant with the secondary market. Depreciation on a roof then sits with the association rather than the insurer, and the gap surfaces at the worst possible moment. Inflation guard, likewise, is no longer required — so it will come off renewals unless it is bought deliberately.
The coverage amount test is unchanged in substance: at least 100% of estimated replacement cost value of the project improvements, documented by guaranteed or extended replacement cost coverage, an insurer's replacement cost estimate, the project's insurance risk appraisal, or a statement from the insurer or another applicable professional.
Every established project is now on Full Review
Fannie: “We are retiring the Limited Review process. Established projects previously eligible for Limited Review must now be reviewed using the Full Review process or, when applicable, the Waiver of Project Review process.” Freddie: “The Streamlined Review project review type is being retired.”
The practical difference is the paperwork cadence. Under Full Review a lender wants the budget, reserve balance, reserve study, delinquency rate, litigation status, special assessments and insurance certificates — on every transaction in the project, not once a year. For a small South Dakota association run by volunteers, that is a new recurring administrative load arriving through the closing table.
Unexpired reviews do not grandfather. In Freddie's words, a seller with a review completed before the effective dates “must still confirm that the project complies with these new Guide requirements for applications received on or after the effective date of such requirements.”
Both waiver paths also require that the project not carry an “Unavailable” status in Fannie's Condo Project Manager, and that there be no critical repairs or evacuation orders outstanding.
Two South Dakota-specific notes
FHA did not follow. No 2025 or 2026 Mortgagee Letter changed FHA's condominium project standards; Mortgagee Letter 2026-09, issued June 23, 2026, is addressed in part to condominium submission sources but touches only mortgagee approval and quality control. FHA's reserve line remains 10%. From January 4, 2027 a South Dakota project can satisfy FHA and fail Fannie and Freddie on the same budget.
The project status itself is not public. Fannie's unavailable-projects report lives inside Condo Project Manager and is available to lenders, not to associations or owners. A project learns its status when a lender queries it, which is generally during a transaction.
What to watch next
The January 4, 2027 date is measured by loan application, not by budget year, so a budget adopted in November 2026 governs applications that arrive after the threshold moves. The question worth following in South Dakota is what carriers do at the spring 2027 renewals — whether the $50,000 cap holds deductibles down, or whether carriers price the same exposure through the per-occurrence limit instead.
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