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Not All Loans Are Condo Loans

January 31 2018

Becoming a condo owner can offer many benefits, from enjoying common amenities to being part of a community with no yard to mow or weeds to pull, and security often is provided. A condominium lifestyle can be great, especially for those looking to simplify their housing.

However, financing a condo can be a little more complex, because not all loans are available for all condo complexes. That's because condos as a property type are different. There are different loan and qualifying rules to take into consideration, and characteristics that are unique to condos.

Fannie Mae and Freddie Mac provide lenders with specific condo lending guidelines that include what they require from the homeowners association, insurance coverage, the percentage of units that may be rentals, the amount of the complex that may be retail space, and other restrictions.

That's why financing a condominium can be more complicated than buying a single-family home. It's also why real estate agents need to work with a mortgage advisor who understands the local condo market, the complexities of condo lending, and how to avoid the gotchas. The key is this: there are many factors that can impact the ability to finance a condo that need to be considered before making an offer.

Getting Financed

One thing that real estate agents sometimes forget is that they may have the world's most qualified buyer, but that buyer may not be able to get a condo loan on the unit they want to buy. How can that be? Because the lender doesn't just look at the financial health of the buyer, they also look at the financial health of the property.

The good news is an experienced mortgage advisor who knows the local condo market knows which condo complexes are more likely to be harder to get financing, which currently won't qualify for any conventional financing, and which are likely to be as easy to finance as any mortgage on a single-family detached home.

Limited Review or Full Review

When a mortgage advisor runs a borrower approval on a loan application for a condo, in the notes for the findings, it will specify if the condo complex requires a limited review, which means far less documentation, or a full review, which requires a lot more documentation.

With a limited review, the only paperwork that's required is a condo questionnaire, the CC&Rs (conditions, covenants and restrictions), the homeowners' association (HOA) bylaws, the HOA budget that shows the reserves, and a copy of the current Certificate of Insurance. Then as long as the condo meets the basic Fannie Mae guidelines – that owner-occupancy is at least at 50 percent in the complex, that the total commercial or retail space is less than 25 percent, that no single entity owns more than 10 percent of the units, and that they are budgeting for at least 10 percent for reserves – this will all be a straightforward review process for the underwriter, who will sign off on the questionnaire and the condo itself.

A full review can take much longer, but in both cases, Fannie and Freddie are simply trying to protect both the borrower and the investor (the entity that purchases the loan) to make sure the condo complex is stable and endures.

Teamwork

It's important to make sure clients avoid falling in love with a new condo before they discover they can't finance it. Give them the advice to talk to their lender first – before they begin their condo search. Encourage them to seek out someone like Opes Advisors who has experienced mortgage advisors, who know condo lending and know their local condo markets. Good mortgage advisors want to help you ensure that your clients don't waste time shopping for properties that they won't be able to buy.

About the Author

Scott Chase is Regional Director for Opes Advisors, A Division of Flagstar Bank. With over 15 years in the financial services industry, he is responsible for the acquisition, retention, and expansion of sales for the Bay Area, Central Valley and Southern California. Additionally Scott leads, coaches, and supports sales activities to promote sales. For more information he can be reached at 650.543.8008 or [email protected].