The variances in financing requirements for a house versus a condominium
Financing details do vary when considering the differences between a House, Attached Dwelling, Townhome or Condominium/Apartment. Understanding how a lender views the property type you are purchasing has bearing on how you qualify for the mortgage loan. Houses or Condominiums come as detached or attached. While some houses do not have a Homeowners Association and HOA dues to contend with, attached Townhomes, and condominiums and other attached dwellings may as well. The one type of property that is the different one in terms of financing is the condominium.
Properties (any of the above types) in a Planned Unit Development (PUD) may have dues to a homeowner’s association that cover upkeep of common areas to payment for recreational facilities or security in the neighborhood. In most cases this doesn’t present too much paperwork, nor does it require anything other than the appraiser to state and verify the amount of HOA dues and what they cover. The Title Company may also obtain this information so that at closing they can prorate dues between the buyer and the seller. This generally pertains to just houses, townhomes or other attached properties not in a condominium complex. You may expect that a lender may have a document that needs to be filled out by the HOA if there are a lot of common areas or recreational facilities.
A condo may also be in a PUD and have HOA dues both to their Condo Association and to the PUD. The PUD may have facilities and amenities beyond what the Condo project offers. Condos in general are a little more complicated with financing, both in terms of paperwork and how much may be financed and what financing programs are available. If you are getting a government loan backed by FHA or VA, they will require that the project be approved by them before they will finance a unit. This usually applies to the entire project being an approved project. It will meet a certain set of requirements and standards and is not allowed to have a high occupancy of renters. Bottom line is if you are getting one of these government backed loans, you will need to also be looking at properties that are already approved by them.
Conventional financing can apply to most condominium projects, though there are some rules about what constitutes an acceptable property. If you are putting less than 20% down, your lender will care about solvency of the HOA, number of units that are rented versus those that are occupied by owners and coverage of insurance. Projects with litigation pending, any known misrepresentation or fraud will also need special review. They will also review limitations on the owner’ ability to make decisions as part of the HOA or Project documents that create an inability to cure a mortgage in default by way of restrictions or right of first refusal provisions.
Usually a Condominium Project Questionnaire is requested from the HOA or retained management for the project. Some companies charge a nominal feel for filling this out of $10-$30. Your lender will take care of getting the right form out. You may need to provide them with the contact information of the person who will fill it out. If this is a purchase, your realtor should be able to assist with this.
For an established condo project they are looking to verify that the project is:
- 100% complete, including all common elements and units
- At least 90% of the units have been conveyed to the unit purchasers
- There is not future phasing or annexation that is forthcoming
- The unit owners have control of the HOA
- less than 90% sold and the developer is holding back units to rent then the construction must be 100% complete
- A developers share of the units held for rental is no more than 20% of total number of units
- HOA fees are paid current for those developer retained units
- No active pending special assessments in the project
A newer condominium project which does not yet meet the above criteria will have different requirements until project is fulling completed without additional phasing and developer has turned over control to the Homeowners Association. This may include the above requirements as well as copies of environmental reports, engineer reports, budgets, appraisals, project approval by local jurisdictions and other documents specific to the project.
Many lenders now have separate review departments just for condominium projects. A Project Review is typically waived for:
- detached condo units
- Units in a tow to four total until project
- Units that are in a PUD
- high LTV refinance loans
Certain types of condominium projects are not typically eligible for conventional financing and may require something in the Non-QM financing. These include:
- Timeshare, fractional or segmented ownership projects
- A project that would allow a priority lien for unpaid common expenses beyond the allowed Fannie Mae limitations
- Projects that are managed as short term like hotel or motel even though units are individually owned
- Projects with property that are not real estate like houseboat projects
- Projects with non-incidental business operations that are owned or opertated by the HOA such a as restaurant, health club or spa.
- Non-residential space exceeds 35%
- Projects with a required upfront or periodic membership fees for use of the recreational amenities that are owned by an outside party like a country club facility or golf club.
- Projects where the HOA is in pending litigation related to safety, structural soundness or habitability of the project
- Projects where a single entity, investor owns more than 2 units in a project of up to 20 units or 20% in a project with more than 21 units
These are by no means a definitive list. There are many nuances and details in regard to these and issues related. If you are considering purchase of a condominium that isn’t mostly occupied by owners or has any unusual characteristic, talk with your mortgage professional and have it reviewed and discussed with an underwriter so that you are prepared for what kind of financing you may be able to obtain on it.
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