It has been established, for as long back as my 25 year mortgage career goes, that if a condo has a high investor level, you were going to have a hard time getting a mortgage. The investor level of a condo is how many units of the total investors own. For example, if a condo has 100 units, and 60 are owned by investors to be rented out and 40 units are owned as primary residences, then the condo has a 60% investor level.

It was always said that FHA wanted to see at least 51% owner occupancy and no more than a 49% investor level. And banks, PMI companies or Fannie Mae might require 60%, 65% or even 70% owner occupied levels, restricting the investor level to a low level. It has been historically shown that condo buildings that are more heavily owner occupied have better performing loans with fewer delinquencies, and this is why Fannie Mae, Freddie Mac, banks and PMI companies analyze this data.

However, I have discovered a guideline change for Fannie Mae and Freddie Mac that says if loan is for a primary residence, with 20% down, and if the condo building is established, that there is no analysis of the investor level at all. What defines a condo building as established is that the building is at least 90% sold and settled, no additional construction is planned, and that the homeowners association has been turned over from the developer to the unit owners.

The big news here is that if you have an established condo building, and are buying a unit as a primary residence, and have 20% down payment, then you do not have to worry about the investor level. 20% down is required because PMI companies still analyze investor level, so this would not work for a 5% down or 10% down loan.

On the one hand, if you love a certain unit and want to buy it at all costs, then this is good news. Of course, you may want to give consideration to buying in a heavily investor owned building for the same reasons that the banking industry does. But here are some scenarios where this has benefited the consumer:

-A client of mine wanted to refinance a loan in a condo building that has 12 units, 4 of which were owned by owner occupants, 7 were owned by investors, and 1 was still pending sale. The building had met the 90% sold and settled requirement, the homeowners had been in control of the association for over a year, and the unit my client wanted to refinance was his primary residence. With an owner occupancy of 33% and an investor level approaching 66% (depending on who buys the last unit) this building would have been impossible to finance up until recently. Under current rules my client will be able to take advantage of refinancing to drop his interest rate quite a bit.

-A client I have done loans for in the past wants to sell some condos he owns in a highly investor owned condo building. He was concerned that his buyers would not be able to get financing. I was able to tell him the good news that he could ensure his buyers financing as long as they were buying a unit as a primary residence and were qualified according to the above.

-A client wanted to buy a condo unit to live in as a primary residence in a building with a 51% investor level, with only 49% owner occupants he was concerned he would not be able to get a loan. I told him that as long as the building was established and he could meet the above parameters, then he would be able to get a loan.

This is big news for many condo buildings that have historically had higher investor levels and have thought they may be locked into being labeled as being a building that is hard to get financing in. These latest rules will help sellers sell, and buyers buy, and condo buildings get some investor owned units back in the hands of owner occupants.

A Non-Warrantable Condo is not a new style of condo, it is a condominium that does not meet the minimum standards set by Fannie Mae and/or Freddie Mac. In other words, the condo cannot be warranted to meet Fannie/Freddie guidelines. Most lenders will want a condo to be warrantable to Fannie or Freddie so that the loan can be sold to Fannie or Freddie, especially now that most banks and mortgage lenders are only selling to Fannie Mae and Freddie Mac. If a condo is not able to be warranted to Fannie/Freddie guidelines, it is usually due to the fact that the condo has a high investor level. Lenders prefer to see that a condo has 51% or more owner occupants with no more than 49% rentals, and in actuality they really prefer 60% owner occupied, or higher.

But there are a whole host of other things that a lender will analyze when looking at a condo to see if it meets Fannie/Freddie guidelines, and the rules vary depending on if the condo is new construction or existing/resale, such as:

1. Are the homeowners or developers in control of the homeowners association?
2. Is the project is subject to additional phasing or add-ons?
3. Are all common elements and amenities are completed?
4. What percentage of all units in the development are sold?
5. Is the condo undergoing any litigation?
6. Are of any of the unit owners behind on their dues?
7. And of course, what percentage of the units in the development have been sold to owner occupants?
8. And there is even more…

The bottom line is that when you are buying a condo, the banks and mortgage lenders will not only be underwriting your creditworthiness, they will also be underwriting the condo.

A CONDO QUESTIONNAIRE MUST BE COMPLETED BY THE PROPERTY MANAGEMENT COMPANY TO DETERMINE THE CONDO'S ELIGIBILITY.

Of course, you may not need a condo questionnaire if your loan approval comes back with a "Limited Review", which I just blogged about here.

The bottom line is that getting a condo loan is more difficult than meets the eye, and has a lot to do with the borrower's down payment, credit score, debt ratios and the condo itself. When looking to buy a condo always call a mortgage professional who can help research the financing options up front before you waste your time going under contract. When listing a condo for sale (attention all Realtors and sellers) ALWAYS consult a mortgage lender for advice on what type of financing is available and how much down payment will be required, so that you can properly market the condo for sale.

No, there is no such thing as a "no questions asked" loan. But, believe it or not, there is something called "Limited Review" for Conforming (loans at $417,000 or less) condo loans, and it makes getting a condo loan "much" easier.

When a lender inputs a Conforming condo loan application and credit score into an automated underwriting system, if the resulting loan approval yields a "Limited Review" as part of the approval, that means some questions related to the condo will not be asked during underwriting.

What a Limited Review specifically means is that a lender will not require much of the documentation that would normally be required when underwriting a condo loan. For example, a "condo questionnaire" would not be required. This is the biggest advantage of a Limited Review. If you are buying a condo that has what a lender sees as an issue, like a high investor level such as 50% or more (investor level is how many units in the building are owned by investors versus owner occupants), then not having to get the condo questionnaire that would alert the lender to that high investor level means you will get a loan approval where you normally may not (lenders have a problem with condos that have a high investor level).

Avoiding the condo questionnaire also saves the money that a property manager would charge for that form, which is typically $50-$150.

You will not get a Limited Review authorization on a condo loan on a 5% or 10% down loan, or with a 680 or 700 credit score. To get a Limited Review you typically need a larger down payment such as 20% down, a higher credit score such as 740 or higher, and you need to be an all around strong loan candidate.

It used to be simple to get an FHA condo loan. Lenders could do an FHA "Spot Condo Approval", which meant that the condo did not need to be on the FHA Approved Condo List, and all we lenders needed to do was verify that the condo met certain FHA requirements (51% owner occupancy, no litigation against the condo, no more than 10% of the unit owners behind in their condo fees, etc). Now the condo approval process is more centralized, and more complicated.

There will be two methods of FHA condo approval:

1. HUD Review and Approval Process (HRAP). This means you have to have FHA approve the condo. Nightmare.

2. Direct Endorsement Lender Review and Approval Process (DELRAP). This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects. So you have to deal with a lender who has their DE, and knows what they are doing.

I will spare you what goes into an FHA condo approval, whether it is being done through FHA or a lender with their DE. The guidelines are 21 mind numbing pages long, so suffice it to say that it will be complicated, and extra time will need to be allowed for FHA financing to get through the approval process. It is not to be feared or avoided, but all parties need to know it will be complicated and require more time.

Getting a condo loan approved seems to get harder and harder each day. Below are the loan approval conditions I got on a recent loan submission for a condo purchase:

1. Buyer to get 20% HO6 dwelling coverage.

2. Statement from the property management company about the cleaning services in the condo's budget. What type of cleaning services are they?

3. Statement from the appraiser on whether having no parking in the project has an effect on the value.

4. The certificate of insurance needs the deductible to be shown.

5. Fidelity coverage of $251,887.

Let's review the absurdity of these.

1. You can read more about this in a recent blog post I did, click here.

2. Huh? Seriously? The underwriter wants me to waste my efforts in finding out what kind of cleaning company the condo has budgeted for? How is this pertinent at all? It is not like the underwriter is questioning a large, special assessment for a roof replacement. I could see the budgetary impact of that. This was a small line item in the budget, for CLEANING!

3. Of course not having parking affects value, doesn't every rookie underwriter know that? But don't they also know that this would ALREADY BE REFLECTED IN THE APPRAISED VALUE?! If the unit appraised for the purchase price without having parking, then the loan is safe, let's move on!

4. I guess it is important for the underwriter to know if the condo has a $500 deductible or a $1000 deductible? Why? Not sure…

5. Fidelity insurance protects organizations from loss of money, securities, or inventory resulting from crime. Common Fidelity claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts. This condo had $200,000 of fidelity insurance coverage. How and why the underwriter came up with her arbitrary number, based on some arbitrary formula I am sure, I have no idea.

Astonishingly, I got simple answers to all these, and although it took a few days, I got the underwriter all she wanted, the loan was approved, and we went to settlement.

This is just one more example of modern day banking. It's not so modern, is it?

An HO-6 policy is the form used for a condominium insurance policy. This condo policy will provide for coverage on the interior walls, interior upgrades, and for personal property held within the dwelling.

How does this apply to mortgage finance? In 24 years of mortgage banking, I have never even heard of HO6 insurance. And that is because when underwriting a condo loan, the banks only cared to see that the dwelling was insured in case of damage. And in a condo, part of condo fees go towards the master umbrella policy, so the unit owner usually does not concern himself with getting dwelling coverage, because the master policy covers the reconstruction of their unit. But now, banks have new HO6 rules. This changed in the middle of 2009, and I have done 30-40 condo loans since then, and am just finding out now!

Fannie Mae now requires that lenders verify that hazard insurance for all condominium projects covers fixtures, equipment, and other personal property inside individual units.  The updated underwriting policy now requires that the borrower obtain a "walls-in" coverage policy (also known as an HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit's appraised value.

So Fannie Mae, in changing this rule, is forcing condo owners to absorb some of the financial/insurance risk. Maybe this is a wise move for condo owners? It may be especially good for condo owners who have done extensive interior renovations, and would never get their unit rebuilt to the level they renovated it to, if they solely relied on the master condo policy. So maybe its good news for the consumer? Maybe its passing the insurance buck to the consumer?

All I know is that I have done all those condo loans I mentioned, since the middle of 2009, and no one brought it up until now! Maybe that is a good thing for all those prior condo loans I did?

The loan I am trying to get approved now is going to get more expensive for the consumer, because I now have to tell him to go out and spend money on an HO6 policy. But in defense of Fannie Mae and the banking industry, the consumer will also be better protected.

Getting a mortgage to buy a condominium is getting more complicated. The best advice I can give you is to make sure you talk to an experienced mortgage professional BEFORE YOU WRITE A SALES CONTRACT. This applies not only to the market I cover most in Washington DC, Maryland and Virginia, but nationwide.

Checking with a lender beforehand ensures that the condo is able to be loaned on. You would be surprised how many condos cannot get financing, especially with Conventional mortgage insurance.

Below are some of the latest twists and rules that a bank or PMI company will be looking for:

If you need mortgage insurance (which means you are doing a Conventional loan and putting less than 20% down) a mortgage insurance company may take issue with the square footage of the condo. Some PMI companies will not approve mortgage insurance for condos below 1000 square feet.

MGIC has recently revised their guidelines to do PMI on condos as small as 800 square feet.

Radian is a mortgage insurance company that will not do PMI on condos less than 1000 sq ft as a rule, however, they will if the lender they are getting the loan from is in their "Platinum Group".

Getting a loan is also complicated by other factors, like what the appraiser states on the appraisal or what the bank believes about a certain area being in a "declining market".

The moral of the story is never to assume that getting a condo loan is a slam dunk, even if the buyer is well qualified with great credit.

It is impossible to keep up with all the latest rule changes, so you should be asking your lender if they are not asking you, questions like:

-are there minimum square footage requirements by the bank or the PMI company?

-will the bank, PMI company or appraiser cite the area as a declining market?

-if the area of the subject property is a declining market, what are the rules? (usually this means that you cannot do a maximum LTV loan, like a 95%, and instead they want an extra 5% down, so the loan would have to be a 90%, or you could look at going with FHA financing).

-what are the minimum credit score requirements of the bank, and the PMI company?

-what are the owner occupancy versus the investor level requirements of the bank? of the PMI company?

You can see how complicated it gets. Below is an email response I got from a bank representative, when I asked about doing a condo loan through them:

"Brian, the three PMI companies we deal with, RMIC, Radian and UGI limit us to 1000 sq ft. when the LTV is over 80% loan-to-value. If it is under 80% loan-to-value, our limit is 600 sq. ft. We also have a 30% investor concentration limitation no matter what the loan-to-value. And if the project is a condo conversion, it must have been completed in both sales and physical conversion for 3 years. Also, if you are doing any condos in Ocean City MD or any of the resorts, forget bringing those loans to us. We sell to FHLMC and we are being told that any condo that has weekly rentals is considered a short term rental and a condotel and not saleable to FHLMC. The Underwriters are required to check online to see if anyone in the project is offering it for rent and 9 times out of 10 there will be someone offering their unit for weekly or weekend rentals. Not sure if FNMA is doing the same. Bottom line, if you are considering doing a condo with us, give me all the details so I can run them by a senior underwriter."

And to show you what we loan brokers go through to do our homework to make sure we can get a loan approved, especially in a condo, here is another recent reply I got from another bank representative:

"Sorry for the delay in responding. On the road all day. There is no Conventional 95% condo PMI loan in existence. We can get PMI on a 95% loan in Washington DC on Single Family DETACHED only. RADIAN Mortgage Insurance Company used to do 95% condos, and that was everybody’s “go to” source for 95% condos for a while, which must have been what you used last time. But they recently stopped 95% condos, for all banks. MGIC is the same, they will only do a max of 90% on a condo.

And we used to do “non-warrantable condos” all day long, but now that we can’t get MI, we have stopped doing high investor level condos, and all the quirky condos. So you have to have 10% down now on a Conventional condo loan, and anything less will need to be 3.5% down on an FHA. If the building cannot get a spot FHA loan, the only way any buyer will get financing is 10% down, 20% down or all cash. And if you have a high investor level, it will likely need to be all cash, Fannie Mae and Freddie Mac won’t do high investor levels. So 20% down would not even be a help on a high investor level condo building."

I could how more, but I think you get the point that getting a mortgage for a condo in the Washington DC area is tricky, and to always consult a mortgage professional before getting excited and writing a sales contract on a new place.

Getting a mortgage for a condominium in the Washington DC area has gotten more difficult, as it has for condos in all areas.

An FHA condo loan is easier to get than a Conventional condo loan. There are many rules to remember when you want to buy a condo, but the basic ones to remember to ensure that you get a mortgage are below. For FHA loans:

-the condo building usually must be 5 units or more.
-the building must be at least 51% owner occupied (this is how many units are occupied by primary residents versus investor owned units).
-there can be no right of first refusal in the condo docs.
-the condo should be complete, with no additional phasing.
-no special assessments pending.
-no legal action against condo.
-the HOA must have been in control of the owners association for at least 1 year.
-at least 90% of the units are sold.
-no single entity owns more than 10% of the building.
-adequate insurance and reserve funds in the budget.

Getting a Conventional condo loan is similar to the above, except that you must usually have at least 60% owner occupancy (some banks requires 65% or even 70%).

When a home buyer wants to buy a condo, the bank will not only qualify the home buyer, but they are also qualifying the condominium. So there are more questions to ask when buying a condo, when you want to get a mortgage.