Condos and Financing

Looking to sell a condominium you have listed, or showing a condo to a potential buyer... if you think this is just another transaction, think again.... securing financing for a condominium has become a tight rope walk. This post will give you the ins and outs of condo financing so you avoid the pitfalls.

To our right is a sample HOA questionaire that is required to be completed for condominium financing. This is completed by the HOA association and is the building block for condominium financing. The simple reason, regardless of borrower strength, if this questionaire is answered incorrectly the lender will deny the loan. I should mention here the term "incorrect" simply refers to acceptable answers, under no situation should these answers be misrepresented (that would be mortgage fraud).

There is no one question on this questionaire that is more important than any other... all carry equal weight. With that said let me share with you some of the hang ups that are typical to condominium financing.

Litigation... pending litigation is one of the primary hang ups when it comes to condominium financing. Typically this litigation is against the builder for deficiencies in the common areas. Litigation because it potentially can result in serious liability will almost always end in a loan denial. Make sure the condominium association is free of all litigation before getting into contract. Regardless of how lovely the home is, pending litigation is a reason to find another home - especially if the buyer needs financing to buy the home.

Owner occupancy rate... This particular guideline is not something most agents consider an important factor, but it too can result in loan denial. Currently if a Condo association does not support a 51% owner occupancy rate, it is not considered eligible for financing. This number seems like it is easily obtainable - but there are overlays that can sometimes hang up financing that you must be aware of... these are considered ineligible projects regardless of occupancy rate: Condotels, timeshare or segmented ownership projects, multi-dwelling unit condominium projects that permit owners to hold title to more than one dwelling unit with ownership evidenced to units by a single deed and mortgage, condo projects that have a non-conforming land use, zoning regulations prohibit rebuilding, projects with leased back recreational facilities, projects with pooled insurance policies, and projects with excessive or ineligible concessions or contributions.

Misc Overlays... In addition, a maximum of 10% of the units may be owned by a single party, commercial use should not exceed 20% of the total square footage for the project, and no more than 15% of the units HOA dues can be delinquent otherwise the project is not eligible for financing.

This is but a taste of some of the overlays... we haven't even discussed insurance requirements or the fidelity bond.

This article is not designed to deter you from trying to sell a condo, but rather to prepare you and the buyer for what they are in store for. As you can expect this does result in additional costs to the borrower. First the HOA is going to charge fees to complete this questionaire and provide the supporting documentation that lenders will require. Not all HOAs are created equal so make sure the escrow period in contract provides enough time to get everything required from the HOA for closing. In addition to the fees these HOAs like to charge, depending on how the loan is structured unless the borrower is putting 25% or more down, the lender is going to increase the loan costs as well. To our left I have cut and pasted in conforming loan adjusters and highlighted the pricing adjustment for condos - a nasty .75% That is three quarters of a point... a substantial pricing adjustment that can be avoided with a shorter term (a 15 year fixed for example) or a larger down payment which I suggest above.

In conclusion let me share with you that what I am breaking down in this email are the guidelines for Fannie Mae and Freddie Mac financing. Agency loans as they are commonly referred to make up 95% of the marketplace right now. If you plan on working around these guidelines you are fighting an uphill battle. I represent approximately 80 different wholesale lenders of which maybe a dozen offer portfolio programs that may offer slightly looser guidelines.

Right now, lenders simply do not want to finance condos, and they have put these guidelines in place to make securing financing for condos as difficult as possible. It is definitely obtainable, I do not want anyone to think otherwise, I simply want everyone to know what they should be prepared for moving forward on a condo purchase.

Any particular questions I am happy to answer.