**Condo underwriting guidelines can change at any time**
Condo loan rules are important! And getting a condo loan has gotten a bit easier with some recent changes that Fannie Mae just made. The best thing you can do is make sure you know which loan rules to look at when buying a condo. It is even more important if you are selling one. Know all the exact details of your condo and how it is run. Then you will know if your buyers are eligible for Fannie Mae/Freddie Mac financing. If not, then you need to let prospective buyers know that they can look for something like a “portfolio loan”. These have more liberal rules than Fannie and Freddie. Condos that have major issues going on that may require a seller to find a cash buyer.
The recent condo loan changes are in bold below.
Some of the important things to look for in a condominium that a lender will also check for are:
- The condo should not be undergoing any litigation.
- It used to be that no more than 15% of the unit owners could be 30 days delinquent on their dues. Now the rule reads that no more than 15% of the unit owners could be 60 days delinquent on their dues.
- The presale requirement has been reduced to 50%. This means that if a building is not Fannie Mae approved only 50% of a condo units need to be under contract to allow a lender to come into the building and do a new loan there. This was formerly a much higher percentage.
- There can be no right of first refusal in the condo docs.
- There should be no special assessments pending.
Some other condo loan rules that a lender will still check for are:
- There needs to be adequate insurance per the Certificate of Insurance and the Fidelity Bond Insurance.
- There should be a satisfactory annual reserve account contribution in the budget. The requirement from Fannie Mae and Freddie Mac is that there is an annual contribution of 10% of the annual assessment/dues income. For example, if the annual HOA assessments are $500,000 a year for the entire building, then there needs to be a $50,000 annual reserves contribution to the reserve account.
- The condo project cannot have more than 20% of the total space used for non-residential purposes (i.e. commercial space).
- If you get a Limited Review condo approval, evidence of the Fidelity Bond is not required. This was not formerly the case.
Single entity owning multiple units, rate issue, but still one to check for:
- It used to be that no single entity could own more than 10% of the units in the building. So if there was a 10-unit condo and one unit owner owned 2 units, we could not do a Fannie Mae loan in that condo. Now 2 ‘same owners’ are OK in condos of 5-20 units. For example: in a 5 unit condo building you can have one unit owner who owns 2 units. In a 12 unit condo building you can have one unit owner who owns 2 units, etc. However, you cannot have one unit owner who owns 3 or more units. And you cannot have several unit owners who own multiple units. Below is a breakdown. Projects in which a single entity (the same individual, investor group, partnership, or corporation) owns more than the following total number of units in the project:
- projects with 2 to 4 units – 1 unit
- projects with 5 to 20 units – 2 units
- projects with 21 or more units – 10%
So on condo buildings that have 5 – 20 units, if you have a unit owner that owns more than 2 units, the project is ineligible. If a unit owner owns only 2, you are fine. On condo buildings that are 21 units or more, one unit owner cannot own more than 10% of the units.
Those are the important basic guidelines that will be looked at. But there are more to know.
But now you know the latest updates to some of the more important rules we lenders look at. These are good questions to get answers to before you list a condo for sale or before you decide to make an offer on a condo.