This Article Is About Issues With Condominium Financing And Mortgage Options
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Condominium Financing is different than financing single-family homes. This is because lenders view condominium financing as riskier mortgage loans. Condominium financing used to be easier to qualify.
But now it is getting harder and more difficult. In order to qualify for an FHA condo loan, the condominium complex needs to be on an HUD Approved Condo List. Borrowers can have a solid bona fide FHA pre-approval. But if the Condominium Complex is not FHA approved there are issues with condominium financing. They can not qualify that particular condominium with an FHA Loan.
Condo buyers would need to purchase it with a conventional or portfolio loan. Many condominium complexes are not renewing their HUD condo certifications. It is becoming more difficult for borrowers to purchase a condominium with an FHA-insured mortgage loan.
Before Making An Offer On A Condominium, Consult With A Loan Officer
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Before submitting an offer on a particular condominium unit, please consult with a loan originator who is experienced with originating and funding condo loans. Just not being FHA-approved is not the only issue with condominium financing. There are two classes of condominium financing.
Warrantable and non-warrantable condominiums. In order to get conventional financing, the condo complex needs to be warrantable. What warrantable means is that 51% or more of the condo owners need to be owner-occupants. Condominium complexes that are 51% or more investor own, rentals, are classified as non-warrantable condos. Cannot get traditional conventional financing on non-warrantable condominiums. I also do specialize in non-warrantable condominium financing. However, they are all portfolio loans with a 20% down payment required. 30-year mortgage loans, but adjustable-rate mortgages; 3/1 ARM, 5/1 ARM, 7/1 ARM.
Processing And Underwriting Condominium Financing
As mentioned earlier, processing and underwriting condominium financing require a lot more work than underwriting a single-family home. Not only does the condominium borrower needs to be approved, so does the condominium unit and the condominium complex. Condominium underwriters will look at the percentage of the rental units in the complex compared to the percentage of owner-occupied condominium units. Lenders do not like a large percentage of rental units. If the rental units exceed 50%, then they cannot do the condominium loan. This is because it is classified as a non-warrantable condominium. Mortgage underwriters will also look at the number of units, one person or entity owns.
Especially if one person or entity owns more than 10% of the condominium units in a condominium complex. Many mortgage companies will not finance a condominium complex where one person or entity owns more than 10% of the units. This is due to the risk factor if the owner defaults on the units, a large percentage of the condominium complex will be vacant.
Issues With Condominium Financing: Condominium Financials
Financials of the condominium complex will be required and reviewed by mortgage underwriters, especially reserves. Red flags in financials include if more than 15% of the total condominium units in the complex are in arrears or delinquent on their monthly homeowners’ association dues.
This is a major risk factor when the condo homeowners association cannot collect timely association dues.
This is because it cannot fund the reserves in case of major repairs for the condominium building.
Issues With Condominium Financing: Reserve Requirement Mortgage Guidelines
Reserve funds are extremely important. At least 10% of the condominium homeowners associations’ annual income needs to be allocated towards the condominium reserves in order for lenders to be able to approve a condo mortgage loan in that condo building.
Reserves are important in case the building may need major repairs such as the following: roof, windows, balconies, elevator repairs, parking lot repairs, general maintenance, swimming pools, gym, other unexpected repairs
Mixed-Use Condominium Units
There are condominium units that are part of a building that has commercial units.
For example, the first floor may be commercial storefronts and the upper level are residential condominium units. Many mortgage companies will not finance these types of mixed-use condominium units unless the commercial units are limited to 20% or less of the condominium complex’s total square footage.
The Team at Gustan Cho Associates Mortgage Group is an expert in condo financing. We can offer both warrantable and non-warrantable condo financing. To qualify for condominium mortgage loans, please contact us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
April 7, 2021 - 3 min read