Are you looking at the right things when buying a condo? Most people look at location, view, amenities, square footage, and level of finish inside the condo unit. But why get excited over a condo and put in an offer if the building is not able to be financed by a mortgage lender? Below is a list of some of the most important things that a lender will be looking for when analyzing a condo to approve a loan for a mortgage borrower. These are more geared towards existing condominiums as opposed to new construction condominiums. I will address new construction condominiums in another post soon. And these also may vary slightly from lender to lender, interpretation of a guideline can vary. For an existing, resale condo, the lender will check for:
- The condo owners/homeowners should have been in control of the homeowners association for at least one year.
- The condo should not be undergoing any litigation.
- No more than 15% of the unit owners can be behind on their dues.
- What percentage of the units in the development have been sold to owner occupants? Preferably 60%, and 65% to 70% is great. There may be some loan options where 51% owner occupancy is sufficient. And with a loan that is a Conforming loan amount, for a primary residence, and if the other criteria are met, investor level does not matter.
- There can be no right of first refusal in the condo docs.
- There should be no special assessments pending.
- No single entity can own more than 10% of the units in the building.
- There needs to be adequate insurance per the Certificate of Insurance and the Fidelity Bond Insurance.
- There should be a reserve account in the budget that is equal to 10% of the annual operating budget.
- The condo project cannot have more than 20% of the total space used for non-residential purposes (i.e. commercial space).
Those are the important basics and guidelines that will be looked at. And if a loan is unable to be made, it may have saved you a lot of hassle and financial loss down the road. You should not want to live in a building that may have high delinquency rates (I usually never see over 2-3%, but recently saw one at 25%!). And to live in a condo where there is a 35% owner occupancy and 65% investor level means there are mostly tenants in the building, who do not regard their units or the building the same way an owner would. And if there is an insufficient reserve account, or budget, or insurance; you obviously would not want to own a unit in the building.
These are good questions to get answers to, if you can, before you get too excited about making an offer on a condo.