Saturday, August 06, 2011

Choose one - condo mortgage or root canal

NASA's mission to Jupiter yesterday.

I mentioned recent increasing scrutiny of condo associations by mortgage lenders in my last post. Just when we thought it couldn't get any more difficult to get a condo loan it did. Tougher rules have been in place for a while now but getting the package through underwriting appears to have just hit a new level of friction. If you're selling, better hope your association management has the required documentation close at hand and is going to be responsive to the lenders often-complicated requests for documents, questionnaires, affidavits and policies. There are management companies that are resistant to Realtors' and lenders' requests for info, often unknown to the very associations that hire them.

If you own a condo and think you'll ever want or need to sell, it would pay to know whether your association will pass the scrutiny of the mortgage lenders. Most of the condo loans I'm seeing now are requiring associations to meet the FHA, Fannie or Freddie standards. Some lenders may make loans in complexes that do not meet these requirements but it makes for a larger audience of possible buyers if your association does pass the test for FHA.

Things will be easier for your mortgage-seeking purchaser if;

  • At least 51% of the units are owner-occupied.
  • No entity or person owns more than 10% of the units.
  • Project is fully complete and not subject to additional phasing or additions, AND
  • At least 90% of the total units are conveyed to unit purchasers other than the developer, AND
  • Unit owners control the homeowners association.
  • At least 10% of the budget provides funding for replacement reserves for capital expenditures, deferred maintenance and replacement cost of major common elements.
  • There is adequate funding for insurance deductible amounts.
  • No more than 15% of the total number of units in a project are 30 or more days delinquent on the payment of their Homeowners Association assessments.

Not meeting any of those items can trigger a full review (think root canal) or can kill the sale. Pay close attention to "adequate funding for insurance deductible" and "at least 10% of the budget provides funding for replacement reserves". If your association has a 10% hurricane deductible on a policy of $3 million dollars then the lender is going to want to see $300,000 in the bank to cover that. If the budget is $700,000 annually, they are going to want to see $70,000 per year being paid into reserves. When an association is voting on the annual budget it is normal for some owners to want to keep monthly fees as low as possible. They may not realize when they vote against an increase in condo fees that they are building an impediment to the future sale of their and their neighbor's units. Funding the reserves at a rate of less than 10% of the total budget or not keeping the amount of the hurricane deductible in the bank might prevent an increase in the monthly fees next year but it also might push your unit into the cash-buyers-only category. Consider your vote carefully.

Selling right now? Don't underestimate the much more attractive nature of a cash offer. A cash deal is much more likely to close considering the current gauntlet of hurdles for a mortgage. If you accept a contract contingent upon a mortgage, be ready to step in and assist in the document request stage and don't pack your stuff until the loan has final approval. My list above is not complete. Requirements are different depending on the lender and type of loan. One constant is the incredible amount of information they want.

My intention here is to prepare condo sellers and buyers for some of the friction in the loan process. Buyers and sellers are successfully closing condos financed with mortgages every day but plenty don't make it to the finish line because they got blindsided by an unknown requirement. To be prepared is better than not. Good luck out there.

"Microsoft isn't evil, they just make really crappy operating systems."
_____Linus Torvalds


  1. We are experiencing exactly what you have written about very detailed requirements from the buyer's lender. FEMA has redrawn the flood maps. Our Cocoa Beach condo assoc was required to increase flood insurance, more than double the insurance premium. Bonding of the association accountant is also an issue. Thank goodness for an association board willing to work through these requirements!

  2. Thanks for the information. Just want to ask if this is the right time to buy a condo?

    condo in Philippines

  3. I would agree a cash offer will move the buying experience along much faster-----but if your willing to jump threw those hoops a mortgage rate of under 4% or possibly closer to 3% would entice one to re-examine paying a sum of cash out of pocket and opt to use someone else's money.You can make more money towards paying that low mortgage payment by investing in a good dividend paying stock. Yes even with today's turmoil.