The Quick Read: It depends on what the lawsuit is about, not on whether one exists. Conventional loans are sold to Fannie Mae or Freddie Mac, and both test the building separately from the borrower. A suit tied to safety, structure, habitability or functional use usually makes the project ineligible. A minor suit, such as a collection action or an insured claim, can pass. Cash-out also has to meet its own borrower-side tests, which this guide covers.
Key Takeaways
- The building gets its own eligibility test. A strong borrower can still be turned down because the association is in a lawsuit.
- Safety, structure, habitability and functional-use suits are the problem. Minor matters can be eligible.
- Mediation and arbitration can count as litigation if they are expected to head to court.
- Cash-out refinances generally get a full project review. The waivers for refinances do not cover them.
- A conventional cash-out on a one-unit primary residence tops out at 80% LTV, subject to lender guidelines and full file review.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.40% as of October 15, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Why Does the Building Get Its Own Test?
The loan has to be saleable. Lenders that arrange conventional loans sell most of them to Fannie Mae or Freddie Mac. Each agency will not buy a loan on a unit in a project with ineligible characteristics. So the building is judged first, and then you are.
That is why a lawsuit you never joined can stop your refinance. The status belongs to the project, not to you. Borrowers can have strong credit, plenty of equity, and a building problem they did not create.
If you are comparing paths, Lendmire’s cash-out refinance programs page covers the overall conventional structure.
What Counts as Litigation to a Conventional Lender?
A project is ineligible under the Fannie Mae Selling Guide when the HOA, or the project sponsor or developer, is a named party to pending litigation and the case relates to safety, structural soundness, habitability or functional use. Freddie Mac’s Guide Section 5701.3 lists a condominium project in litigation as an ineligible project type, with a similar trigger.
Three details catch people:
- Pre-litigation counts. If the lender finds arbitration or mediation that is reasonably expected to become a formal lawsuit, Fannie Mae’s litigation policies apply. Freddie Mac also reaches ADR proceedings.
- Developer suits count. If the builder or sponsor is being sued over structural issues, that can trigger ineligibility too.
- Plaintiff or defendant. Trade-press coverage notes that it generally does not matter whether the association is suing or being sued. The subject matter drives the result.
Both agencies also keep project status tools. Fannie Mae uses Condo Project Manager, and Freddie Mac uses Condo Project Advisor. An “Unavailable” or “Not Eligible” status stops the loan from being sold to that agency.
How Is the Loan Underwritten, Step by Step?
Think of it as two files running side by side: the building and the borrower.
1. Identify the project. The lender looks up the building and checks its agency status before spending your money on an appraisal. Asking for that early check is one of the most useful things you can do.
2. Run the project review. For cash-out, expect a full review. Fannie Mae’s Full Review requires that the project not be ineligible under B4-2.1-03. Freddie Mac likewise requires an eligible review type and a project that is not ineligible.
3. Collect documents. Typically that means the HOA questionnaire, meeting minutes, financials, engineer reports, insurance verification and, where a suit exists, a letter from the association’s attorney. If the questionnaire does not give the lender enough to stand behind eligibility, the lender has to ask for more.
4. Apply the minor-matter test. This decides most files. It is covered in the next section.
5. Order the appraisal. The agencies do not publish a specific rule on how appraisers treat HOA litigation. Fannie Mae’s condo FAQ says critical repairs or large special assessments may call for an appraisal to judge the effect on marketability. In practice, a pending suit with repair costs attached can show up there.
6. Underwrite the borrower. Credit, income, ratios and equity are reviewed against the cash-out rules covered below.
One date worth knowing: Fannie Mae has said loans with application dates on or after August 3, 2026 are not eligible under its Limited Review process. That makes the full review the practical path.
When Is a Lawsuit “Minor” Enough to Pass?
A lawsuit can pass when it has no impact on safety, structural soundness, habitability or functional use and fits an approved category. The two agencies word the test differently, so one answer does not fit both.
Fannie Mae. The project can be eligible if the lender reasonably finds the matter minor with insignificant financial impact. A common example is the HOA as plaintiff in a foreclosure or past-due assessment action. Insured claims where the amount is known and the insurer is defending can also fit, though you should confirm current wording against the Guide itself.
Freddie Mac. The dispute cannot touch safety, structure, function or habitability, and it has to fall into a listed category:
- The potential judgment or settlement is likely covered by the HOA’s insurance. If the attorney says it will not likely be covered, the project is ineligible.
- The amount in dispute is not expected to exceed 10% of the project’s funded reserves, provided using reserves does not violate applicable law.
- The matter is a non-monetary neighbor dispute or a right-of-quiet-enjoyment issue.
Freddie Mac also expects the seller to keep documentation supporting its conclusion that the matter is minor. So the quality of the attorney’s letter matters a great deal.
| Suit type | Typical reading | What helps |
|---|---|---|
| HOA collecting past-due assessments | Often minor | Attorney letter confirming scope |
| Insured injury claim | Can be minor | Insurer confirmation of coverage |
| Neighbor or quiet-enjoyment dispute | Can be minor | Attorney status report |
| Structural or construction-defect suit | Usually a problem | Proof work is already remediated |
| Safety, habitability or functional-use suit | Ineligible | Resolution and dismissal |
Construction-defect suits deserve care. An HOA being the plaintiff does not make a case minor. One law-firm summary suggests such a suit fits the carve-out only when the association is recovering funds for issues already fixed. Treat that as a signal to check the current Guide text, not as a promise.
Why Cash-Out Is Harder Than a Rate-and-Term Refinance
A refinance waiver does not rescue a cash-out. Under Fannie Mae’s waiver of project review, the waiver applies to Fannie Mae-owned loans refinanced as limited cash-out. Freddie Mac’s “exempt from review” category covers a Freddie Mac-owned no-cash-out refinance. A true cash-out sits outside both.
So a neighbor who did a simple rate-and-term refinance in the same building may have skipped a project review that you will not skip. Same building, different transaction, different answer.
Small buildings can be treated differently. Fannie Mae waives project review for detached condos, two- to four-unit projects and certain five- to ten-unit projects. Do not read that as a free pass. Fannie Mae’s FAQ says units must still be safe, sound and structurally secure.
What Are the Borrower-Side Cash-Out Rules?
On a conventional cash-out, the leverage depends on occupancy and unit count. The Fannie Mae Eligibility Matrix shows 80% LTV on a one-unit principal residence and 75% on two- to four-unit properties. A condo is usually treated as one unit, subject to project eligibility. Second homes and investment property are also held to 75%, so occupancy decides the leverage.
Other mechanics, subject to lender guidelines and full file review:
- Seasoning. The first mortgage being paid off must be at least 12 months old, and at least one borrower must have been on title for six months. Delayed financing, inheritance and legal-award exceptions exist.
- Ratios and reserves. Wholesale conventional programs start at a 620 decision score, and the automated finding governs most files with a total ratio ceiling of 50%. On DU loans, a DTI above 45% requires six months of reserves.
- Listed property. If the home was listed for sale, it must be off the market by the disbursement date.
- Texas. A cash-out on a Texas homestead is capped by the state constitution at the agency figure.
Special assessments matter too. Fannie Mae requires lenders to review them, and dues or assessments tied to litigation or repairs can push your debt-to-income ratio up. If the building is levying money to fight a suit, that can cost you at the ratio line even when the project is eligible.
Where the General Rule Breaks
- Overlapping red flags. Critical repairs, failed jurisdictional inspections and evacuation orders can make a project ineligible on their own, and often travel with litigation.
- Occupancy. A second home or investment condo in the same building gets lower leverage than a primary residence.
- Reserve rules. Condo reserve expectations are an active area. One secondary source claims a change is coming, but it is unverified against Fannie Mae’s own pages, so ask your lender what applies to your file now.
- Different agency, different answer. A building that fails one agency’s test may fit the other’s. Lenders usually check both.
- Non-agency options. Portfolio or non-QM lenders may finance non-warrantable condos under their own rules. Those loans usually carry different terms, so ask for a Loan Estimate and compare the full picture.
Common Myths
“Any lawsuit kills a condo loan.” Not true. Collection actions, neighbor disputes and insured claims can pass.
“If the suit is small, it’s fine.” Not if it touches safety, structure, habitability or function. Size does not rescue those.
“Mediation isn’t litigation.” Both agencies reach ADR and pre-litigation activity.
“My credit decides it.” Your profile matters, but the project status sits on top of it.
What Should You Do Before Applying?
Here is the practical order, and it is a decision as much as a checklist.
1. Ask the HOA manager whether any suit, mediation or arbitration exists, who the parties are, and whether the insurer is involved.
2. Ask for the questionnaire, recent minutes and financials.
3. If a suit exists, ask for the association attorney’s letter. It should state the subject, the exposure, and whether insurance covers it.
4. Have the lender check Condo Project Manager and Condo Project Advisor status before the appraisal is ordered.
5. Decide on timing. Cash-out now works only if the building clears review. If it does not, the options are waiting for the suit to resolve and be dismissed, exploring a non-agency loan with different terms, or leaving your current loan in place.
Expect added time from attorney letters and insurer confirmations, especially if the association’s counsel is slow to answer. That is a reason to start early, not a reason to skip the check.
If you are keeping your current loan because it carries terms you do not want to lose, that is a legitimate answer too. A cash-out replaces the existing first mortgage, so the new terms apply to the whole balance.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Warrantable condo: a project that meets Fannie Mae or Freddie Mac standards, so loans on its units can be sold to them.
Project review: the lender’s check of the building, separate from your personal file.
Minor matter: a lawsuit with no bearing on safety, structure, habitability or function and little financial impact.
ADR: alternative dispute resolution, such as mediation or arbitration.
Seasoning: how long a loan or title must have existed before a cash-out can be done.
Special assessment: a charge the association levies on owners for repairs or costs beyond regular dues.
Frequently Asked Questions
Can I get a conventional cash-out if my HOA is the plaintiff?
Sometimes. If the HOA is suing to collect past-due assessments, that is a classic minor matter. If it is suing a builder over structural defects, the case is not automatically minor, and a lender will look closely at what the suit covers and whether the work is already repaired.
Does mediation or arbitration count?
Yes, it can. Both Fannie Mae and Freddie Mac reach ADR and pre-litigation activity when it is expected to proceed to formal litigation, so an unresolved dispute may need the same review as a filed lawsuit.
Can a small building skip the review?
Project review can be waived for some small or detached projects, but the units must still be safe, sound and structurally secure. Do not assume a small building escapes scrutiny of a suit.
Does the building’s status follow me if my credit is excellent?
Yes. The status belongs to the project. Strong credit and equity help your side of the file, but they cannot cure an ineligible project on an agency loan.
Should I wait for the lawsuit to end?
It depends on the case. A matter that is resolved and dismissed before closing removes the issue, while an open safety or structural suit may take a long time. Weigh how much you need the cash against how long you can wait.
Next Step
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. For related reading, Lendmire’s piece FHA and Conventional Cash-Out Requirements for a Condo Primary Home covers the building-eligibility side for FHA owners. Nothing here is a commitment to lend, and every figure is subject to lender guidelines and full file review.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B4-2.1-03, Ineligible Projects
2. Freddie Mac Guide Section 5701.3
5. Fannie Mae Selling Guide B4-2.1-02, Waiver of Project Review
6. Fannie Mae Eligibility Matrix
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Conventional Cash-Out Refinance Requirements on a Paid-Off Home · Can a Condo Owner Get a Conventional Cash-Out Refinance? · Conventional Cash-Out Refinance Requirements for a Sibling Buyout
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.