5 things you should know about financing a condo
Should friends let friends buy condos? While condominiums took the brunt of home value loss in many places across the country, they also represent some of the biggest bargains around. Here's what you should know before shopping for a condominium and a condo loan.
For most people, buying a condo means financing a condo. In today's lending environment, financing a condo is not an easy accomplishment. Learn what's required for a condominium loan so you don't waste your time on units you can't finance or even afford.
The condo catch-22
The most problematic requirement for new projects is that 50 percent of the units must be sold before the development is eligible for FHA approval, and 70 percent of them must be sold before Fannie Mae or Freddie Mac will finance them. Of course, it's extra-difficult to sell the units when financing isn't readily available. Another problem that you might encounter is that the best bargains are found in projects that have a lot of foreclosure activity. However, that same foreclosure activity is likely to make the development ineligible for many types of financing. If you run into this problem, try smaller local banks that keep the loans on their own books, or search out lenders that specialize in financing condominiums.
Fannie and Freddie financing
Fannie Mae and Freddie Mac publish a list of approved condominium projects, and if you buy a unit in one of these developments and are well-qualified, you should be able to finance it. However, the backlog of condo associations seeking approval is enormous, and the list of approved projects is still fairly short. Your loan agent can request a "spot" approval for an individual unit if the condo project meets the following criteria:
- No single entity or person can control more than 10 percent of the units in a development;
- If the project comprises 20 or more units, the homeowners association (HOA) must have fidelity insurance so that the homeowners are protected from embezzlement;
- Mixed-use developments are allowed a maximum of 20 percent commercial space;
- At least 85 percent of the units must be current on their HOA dues;
- For a new development, 70 percent of the units must be pre-sold;
- The HOA must have capital reserves of at least 10 percent of its budgeted income, so it can handle unexpected expenses without resorting to special assessments.
While these requirements can be a pain, they can also be a blessing. Would you want to end up in a building where the owners aren't paying their dues and the roof can't be repaired? Conversely, Fannie Mae or Freddie Mac approval can be a major selling point if you need to move.
FHA condo loans
FHA will only finance condos on its approved list. The agency no longer allows "spot" approvals of individual units. FHA guidelines are more liberal in some ways -- they allow up to 25 percent commercial space in a development, for example. Newly built projects must meet these criteria as well:
- A minimum of 50 percent of the units must be owner-occupied;
- A minimum of 50 percent of the units must be pre-sold.
Approved condo projects can be found on HUD's website. The biggest problem that you are likely to encounter with an FHA-approved project is that there may already be a lot of units financed with FHA loans. Per FHA, a maximum of 30 percent of the units in an existing project can be financed with FHA-guaranteed mortgages (50 percent through December of 2010).
How can you get a condo development approved?
It won't be fast, but it can be done. You'll need to work with your lender to complete one of the following processes:
First, your lender can submit all the necessary paperwork to the HUD Review and Approval Process, or HRAP. Expect that approval to take four to six weeks, although HUD's press release states the process has been "streamlined to allow for uncomplicated condominium project approvals."
If your lender is authorized to review and approve condo projects through the Direct Endorsement Lender Review and Approval Process (DELRAP), you may get a speedier approval. When shopping for a condominium loan, ask lenders if they have unconditional Direct Endorsement authority. This means that they have approved staff and expertise for the process of reviewing condo projects.
Condos and mortgage insurance: Good luck
If you need mortgage insurance to buy your condo, know that any of the following can make a condo ineligible for mortgage insurance:
- Tenant/investor ratio above 30 percent;
- Pending lawsuit;
- Ugly buildings (ugliness is actually referred to as a "condition which affects function or marketability");
Mortgage insurers that allow condominiums won't insure your loan if they already insure a high percentage of units. Genworth, for example, won't insure more than 33 percent of the units in a project. In addition, credit score requirements for those financing a condo may need to be as high as 740 in order to get mortgage insurance.
When financing a condo, mortgage rates are far from the only consideration. Shop for your lender and get approved for your mortgage before you go bargain-hunting for housing.