Condo Financing Rules
Hello, I wanted to talk about condo financing, and some of the things that a lender will look for when doing a loan for a condo that you want to buy. So it’s important to know that condominium financing is different than when you buy a townhome or a detached home. Because on a condominium there’s other moving parts. You’ve got a budget, a reserve account, property managers. There’s lots of rules and things.
Approve the borrower, and approve the condo. Two approvals!
So when you buy a condominium and get a loan, you’re really getting two loan approvals. One for yourself as far as your credit characteristics go. We’ll be looking at income, assets, debt ratios, credit score. And you’re also getting an approval for the condominium. They’re going to vet a lot of different things that are required by Fannie Mae and Freddie Mac that all lenders have to check the box on and analyze and make sure they’re acceptable. So I’m going to go down some of the more important ones. There’s pages of rules. I wanna try and hit some of the highlights. This is a blog that I wrote. You can see the URL here, getloans.com/blog/latest-condo-rules. So this blog is dated September 2016. I’ve updated it recently. But do be aware that condo rules as any other mortgage guidelines can change at any time. But here’s the latest.
Condo should not be undergoing any litigation.
If it’s undergoing litigation, that’s not necessarily an automatic no to get financing. But it’s a big deal. And we have to see, “Well, who is suing whom? Is the condo being sued? Is the condo suing the contractor?” That could be an issue. Are they suing because there’s a problem with the windows or the foundation or the roof? If there’s anything that suggests that there’s structural issues, that’s going to be a big deal. If the condo is being sued, a lender would take a look at, “Well, what’s the maximum financial obligation? And does the master certificate of insurance, the COI, cover for that potential outcome?” So it’s not necessarily going to mean an automatic loan rejection if you are wanting to buy a condominium in a building that’s involved in litigation. But it’s serious. And they’re going to take a close look at it.
Number two. So 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, it’s 15% of the unit owners can’t be 60 days delinquent on their dues. That’s pretty liberal. I think I’ve seen one time in my long mortgage lending career where a building had unit owners in that bad a shape. And it was a really bad economy, and it was just… It’s rare. But I just want you to know there are certain data points, that’s one of them, that they’re going to be looking for.
Three, the presale requirement has been reduced to 50%. This is if you’re looking at a new construction condominium. Let’s say that you’re one of the first ones to see it, and it’s only 10% presold. You can still buy a unit. You’re either going to have to wait until they hit their 50% presale requirement, and then the developer of that condominium would start to sell and settle their units en masse. Because they’ve hit that important Fannie Mae and Freddie Mac requirement, 50% presale.
Or a developer may have kind of a preapproved lender that’s willing to close loans and let people move into the building when it’s still in the front half of its presale. You could be the first one to buy a unit, walk in the door and live there while they’re still selling all the other units if the developer has the right lender approved for that. But in typical Fannie Mae and Freddie Mac fashion, they’re a little more conservative. You have to wait until there’s 50% of the building sold.
Right of first refusal
There can be no right of first refusal on the condo docs. That’s pretty standard. I don’t think I’ve ever seen where that’s not been the case.
Special assessments – Condo Financing
There should be no special assessments pending. That’s like the litigation. It’s not an automatic no-no, if there is a special assessment either pending and being considered or ongoing. But what is it for? How much is it? Why? If it’s structural-related, maybe there’s a massive roof problem. The association wasn’t properly prepared fiscally. And now they’ve got to tax everybody, so to speak, with a special assessment. And your fees might double or triple for the next six months or a year. That’s a problem, and you probably would get that loan rejected.
Adequate insurance – Condo Financing
Number six, there needs to be adequate insurance per the certificate of insurance and the fidelity bond insurance. That’s usually pretty standard. I’ve never seen that be a problem. Most condo developers know how to properly insure their buildings.
Annual reserve account contribution
There should be a satisfactory annual reserve account contribution in the budget. This really speaks to special assessments and just keeping ahead of the budget and making sure that the association is prepared for surprises. So the specific requirement by Fannie Mae and Freddie Mac says that there has to be an annual contribution of 10% of the annual dues income. So let’s say you’ve got 100 units. Maybe the average dues are $400 a month, $4800 a year. What is that? $480,000 in annual revenue. Then the requirement would be that they’ve got $48,000 a year being contributed continually every year to the reserve account, just to make sure that that’s ongoing and constantly being fed.
The condo project cannot have more than 20% of the total space used for commercial space. This one’s been around for a long time. It really hasn’t deviated. And it’s pretty rare. Most condos that I see are totally residential in nature. I just saw one for the first time in a long time. The first floor was all retail, the next four floors were office space, and the next four floors were residential. Well, that’s probably 50%, 60% commercial space. And you would not be able to get a traditional Fannie Mae, Freddie Mac loan in that building. It would have to be a cash offer.
Or a portfolio loan, which are higher interest rates and bigger down payments. And maybe they’re adjustable rate mortgages are not fixed rate mortgages. They’re non-Fannie Mae, non-Freddie Mac loan options. Not a lot of people use them. You’d have to really love that condominium if it doesn’t conform to that guideline, to take a portfolio loan, but some people do.
Fidelity bond – Condo Financing
If you get a limited review condo approval, evidence of the fidelity bond is not required. That wasn’t formerly the case. That just doesn’t come into play. I’ve never seen that be an issue. Most people get proper fidelity bond coverage, which is insurance on whoever handles the money, the treasurer, maybe some of the board of directors. If somebody absconds with the money and runs away, you’ve got insurance to cover that and they would replenish the money that was stolen.
Multiple unit ownership – Condo Financing
Here’s an interesting one, the last one. So I’ll call this one multiple unit ownership. It’s the multiple unit ownership rule. Let’s say you’ve got a 100-unit condominium. And let’s say 20% of those units are owned by one person. Maybe it’s the original developer, maybe one person who’s rich just went in about 20 units, lives in one and rents 19. That’s a problem. You’ll see in smaller buildings, in condominium projects that are two to four units, you can have projects in which a single entity, one owner, one individual, one ownership group owns more than the following total of number of units.
So in a small building, if you’ve got someone that owns two, that’s a problem. In a building that’s five to 20 units, if they own two units, that’s a problem. And then in the bigger buildings, 21 units and up, that’s the 10% rule. You have a 40-unit building, you’d have to have somebody that owns four units and up in order for that to be a problem. So just know that multiple ownership, multiple unit ownership is something that a lender has to look into.
Conclusion – Condo Financing
Again, there’s a lot of other guidelines. This is just hitting some important highlights. You can read the blog. There’s the URL. Or you can just click on my blog, and you can go to the search box. Click on the search box and you can enter the title of that blog or any other topic that you want to search. Enter latest condo rules, and you can find the blog that way. Just know that there’s a lot of things that we look at for condominiums. It’s trickier financing than for a townhome or a detached home. Stay in touch with questions on condominium financing, condos in general, any other type of financing, interest rates. Please check in, ask questions. Would love to hear from you. I hope this video helped. Thanks very much.