Condo Purchase Versus Home Purchase
Due to the real estate and mortgage meltdown of 2008 and the historical number of foreclosures throughout the country, new FHA, Fannie Mae, and Freddie Mac mortgage lending guidelines have been implemented on condominium unit purchases. Condo mortgage loans are much tougher than single family home mortgage loans. Not only does the mortgage loan applicant need to be qualified and pre-approved but also the condominium complex needs to be approved and meet FHA, Fannie Mae, and/or Freddie Mac mortgage lending guidelines. A mortgage loan applicant can have 800 plus FICO credit scores, have strong job stability, very low debt to income ratios, and ample reserves but if the condominium project does not meet FHA, Fannie Mae, and/or Freddie Mac guidelines, they cannot get their condominium mortgage loans approved via FHA and/or Conventional means. They may get a portfolio lender to approve their condominium purchase loan, however, all condominium mortgage lenders consider condo mortgage loans very risky and their mortgage lending standards may be as strict or tougher than traditional mortgage lenders.
Due to the many hurdles involved with condominium financing, many condominium unit sellers have only allowed cash only buyers to see their condo units.
FHA Condo Purchase
If you are only approved for a FHA insured mortgage loan and cannot qualify for a conventional loan, your choices in shopping for the right condo unit may be limited. FHA will only finance FHA approved condos. FHA spot loans are no longer in existence. More and more condominium complexes who were FHA approved are not renewing their FHA certification status due to the high renewal costs. If you are only approved for a FHA loan, you need to make sure that your realtor not only checks with the FHA approved condominium list but also to contact the condo project’s condo association and make sure that the condo project is FHA approved.
Fannie Mae And Freddie Mac Condo Lending Guidelines
For a condo unit to be eligible for conventional financing, mortgage lenders need to make sure that the condominium complex qualifies Fannie Mae and/or Freddie Mac lending guidelines because utlimately these two mortgage giants will buy the condo loans originated and funded by condo mortgage lenders. The condo mortgage lender needs to go through a review process which involves the condo homeowners association and the subject condo complex and condo unit in order to make a determination if the condo complex and unit meets the eligibility requirements for conventional mortgage loan financing. There are two types of reviews that needs to be done. Either a full review of the condominium and its financial needs to be performed or a limited review of the subject property. If a condo buyer puts the minimum 5% down payment on a condo purchase and has less than perfect credit and lower reserves, a full review of the condominium project may most likely be required. Minimum down payment for a second home condo loan is 10% down payment. Minimum down payment for an investment condo loan is 15% down payment.
Full Review On Condo Purchase
The criteria for a full review is that the condominium needs to have 51% or more of its units be owner occupant. This means it needs to be a warrantable condominium unit. No single person or entity can own more than 10% of the condominium units. Maximum commercial space in the condominium project cannot be more than 20% on mixed used condominium projects. Litigation is extremely frown upon and a condominium project with major pending litigation will most not likely be approved. If there are litigation due to defects in construction and/or structural issues, the condominium project will definitely not be approved. Full financials and declarations of the condominium association will need to be provided to the mortgage lender. Mortgage lenders will want to see line items for cash reserves with a minimum of 10% of assessments and income being collected by condo unit owners. Mortgage lenders do not want to see no more than 15% of the condo homeowners association dues delinquent for more than 30 days.
Renting Your Condominium
Condo unit rentals cannot be advertised as daily rentals like a hotel or motel. For rentals, it needs to be a minimum of 3 day rentals. There must be sufficient insurance coverage with regards to hazard insurance, flood insurance, liability insurance, and the coverage of the individual condo unit owner, HO6.
With a full review, the full condo docs consisting of compliance, by laws of the condominium associations, restrictions on the right to sell or rights of first refusal, any ammendments to the original condominium documents, the legal rights of guarantors and martagees, the rights of first mortgagees, any unpaid fees and dues. Anyone purchasing a condo unit that is less than 400 square feet will be required to have the mortgage lender do a full review.
Limited Review Versus Full Review
Limited review versus full review is the way to go for condominium unit buyers. A full review can take time and can be costly and if the condo mortgage underwriter finds any flaws in the condo association’s financials and/or if there are litigation issues, the condo mortgage loan applicant can get their condo mortgage loan application denied. To pass a limited review, the condo complex cannot have no more than 10% of the units owned by any one individual and/or entity. If the condo complex is a multi unit condo project, no more than 20% can consist of commercial space. No structural and/or construction defects can be active, present. The individual condo unit needs to be at least 400 square feet or larger. Not more than 15% of the condo homeowners association dues can be delinquent for 30 days or more. The condominium homeowners association cannot allow its condominium owners to do daily rentals like a hotel and/or motel and cannot be advertised as such. For condominium unit owners wanting to rent, they need to have a 3 day rental minimum. To be eligible for limited review for a condominium buyer, they need to put a minimum of 10% down payment for an owner occupant home, and 75% down payment for a second home financing. Condo mortgage lenders may require a larger down payment for an owner occupant condominium unit buyer depending on circumstances. Investment condominium units do not qualify for limited review and needs to go through full review.