Most homebuyers know it's smart to get preapproved for a mortgage before they make an offer to purchase a property. But if you're shopping for a condominium, you should be aware that not only your financial status, but also the state of the condo complex and condo association will be subjected to some serious scrutiny before a lender will approve your loan.
In fact, there's "a very high bar" for borrowers to obtain condo loans today due to this double process, according to Scott Canady, federal affairs consultant at the Community Associations Institute (CAI), an organization in Falls Church, Va., that educates condo owners, associations and board members.
"The condominium association itself must first undergo an extensive underwriting system before you even begin to approach the underwriting applied to the individual borrower," Canady says. "This two-step process creates obstacles, especially for purchase financing."
3 obstacles of condo financing
No. 1: Complex approval. The first obstacle is approval of the condominium complex by the Federal Housing Administration in the case of an FHA loan, or Fannie Mae or Freddie Mac in the instance of conventional financing.
The approval process can be time-consuming and costly. So if a complex where you'd like to live isn't approved for the type of financing you want, address this issue with the seller as soon as possible.
"It's not something you would want to wait until a day or so before your closing to do," Canady warns. "You want to start early and pay attention because if any of the questions cannot be answered affirmatively, your financing option may not be viable."
Condo associations aren't required to apply for approvals. And some are loath to cooperate, given the legal risks, information-gathering chores and costs, which can amount to thousands of dollars if a consultant is hired to do the paperwork.
"You cannot force the association to spend that kind of money if that's the decision the association takes," Canady says. "Somebody has to collect the information. Somebody has to sign the certifications and whatnot. It's an expensive proposition."
Still, associations have an incentive to make the effort since broader condo-financing options can benefit all the owners within the complex, says Jason Kulas, a loan officer at Monarch Mortgage, a mortgage loan company in Norfolk, Va.
"There's no benefit to them not to do it because [if they don't] it could really limit the type of financing that somebody would be able to acquire to purchase a property in that community," he says. "It's going to help the value of those homes."
No. 2: Condo questionnaire. The second obstacle is a condominium questionnaire, which contains information about the complex, condo association and owners, according to Kirk Chivas, chief operating officer at First Commerce Financial, a mortgage loan company in Wixom, Mich.
Each lender uses a different questionnaire, but at least some of the questions typically focus on owner-occupied units, bank-owned units, delinquent homeowner dues and litigation. Lenders also ask questions that reflect their own peculiar concerns and requirements, known as "overlays," Kulas explains.
Condo questionnaires usually aren't free. Chivas says he's seen associations charge from $50 to $300 for this paperwork.
Local custom and negotiation determine who pays for the questionnaire. Kulas says he's seen buyers, sellers, real estate brokers or lenders pay for questionnaires.
The approval and questionnaire guidelines are especially strict for FHA loans, according to Canady. He says if a complex doesn't meet the criteria in any one respect, there are no exceptions or appeals. There's also a seasoning period during which a complex the FHA has rejected must wait before reapplying. That means more delays for the buyer.
No. 3: Master insurance. The third obstacle is property and casualty insurance in the form of two policies: One that covers the association's risks and another that covers your risks as an owner. The association's policy can be a loan stopper, particularly if the coverage hasn't been reviewed in many years. Chivas says the coverage amount often has to be raised -- usually at greater expense -- to meet the loan guidelines.
"About 33 percent of the time, there have to be adjustments made to that master insurance coverage," Chivas says. "It's enormously a pain in the butt."
The bottom line for condo shoppers is that property characteristics count and could derail your loan even if you're a well-qualified borrower. The only option to completely avoid these obstacles is to pay cash.
Marcie Geffner is an award-winning freelance reporter, writer, editor and blogger whose work has been published by MSNBC, CNBC, Yahoo! Finance, Fox Business, Bankrate.com, AOL Real Estate, ThirdAge.com, Fidelity.com, Inman News and dozens of major U.S. newspapers. She holds a bachelor's degree in English from UCLA and MBA from Pepperdine University. You can follow Marcie on Twitter: @marciegeff.