Wednesday, September 7th, 2016
Getting a mortgage typically involves the buyer and the bank. But when purchasing a condo, loan deals involve a third player: the condo association.
Lenders are more strict when financing condos because the homeowner isn’t solely responsible for maintaining the value of the property. When someone buys a condo, they’re also purchasing an ownership share in common areas ranging from the grounds to shared amenities. These are managed by the condo association, whose officers are elected by fellow residents.
Condo association dues go toward maintenance and upgrades, as well as premiums on a master insurance policy. Lenders want to ensure those dues sufficiently cover not only routine expenses but also any major outlays for repairs or unexpected expenses, such as a damaged roof. Lenders like to see reserves equal at least 10% of the annual budget.
Another red flag for lenders: developments where more than 10% of units are owned by one investor. If the investor defaults on financing or monthly dues, the condo association’s budget could fall apart. That investor could also sell his or her units suddenly at fire-sale prices, depressing property values of the entire development.
If a condo association has insufficient reserves, it may have to raise dues or charge residents a one-time assessment. This surprise financial hit could compromise borrowers’ ability to pay their mortgages. Or worse, a large assessment might lead to a property value reduction.
Finally, a lender will investigate any pending litigation filed against the condo association. If it’s something minor a lender may overlook it, but if it’s structural damage due to poor workmanship, the lender may decline financing.
To get a development’s financial profile, lenders will send a questionnaire to the condo association that a representative or its maintenance company will complete. This process typically costs $100 to $300, which is paid by the home buyer.
• Higher interest rates for lower down payments. Lenders typically charge 0.125-.25% higher rate for condo buyers who put less than 25% down with repayment terms > 15 years.
• Check disclosures. Because condo developments know lenders will need to see association financials, documentation is often provided upfront to buyers before they make an offer.
• One more condo-deal breaker. Lenders typically go by Fannie Mae rules that no more than 24% of the property can have a commercial use.