What Does it Take to Finance a Condo? Part 2

by Tony Abate · May 1, 2014

As discussed in part 1 of this topic, obtaining a mortgage on a condominium presents additional hurdles that do not exist when financing a standard home. This previous post delved into the “nuts & bolts” aspects of a condominium, & why it is different than financing a free standing home. In this post, we’ll get down to the nitty-gritty, & talk about what can make a condo approve-able, or “warrantable” in mortgage speak. We will also explore some things that can simply make a condo project ineligible for most types of financing. The items below are relevant to “conventional” mortgage financing of an existing condo project. Subsequent posts will discuss fha/va requirements, & what to do with non-warrantable condos (plot spoiler: Ross Mortgage Corporation has programs that permit financing for some non-warrantable condominiums!). Here is what a lender typically looks for when financing a condominium using conventional financing:

Established condos must have at least 51% of the units conveyed as “owner-occupied” units. ***Important note: this requirement is WAIVED when someone is purchasing a unit to be their own primary residence. Translation: you should only have to worry about this if you are seeking to finance a condo that will be a 2nd home or an investment property.
No more than 15% of the units can be 30 days or more past due with the monthly payments owed to the association.
A fidelity bond or fidelity insurance is required on condo projects with more than 20 units. This is sometimes referred to as “employee dishonesty” insurance, & protects the association against fraudulent or dishonest acts committed by the association board.
No more than 20% of the total space in the condo project can be used for non-residential purposes.
No single entity can own more than 10% of the total units in a project. Note that units owned by the developer during the “marketing” stage are not counted in this calculation.
The condo budget must provide for funding of replacement reserves for capital expenditures & deferred maintenance that is equal to 10% of the annual budget.
The condo project must be substantially complete including common elements, & at least 70% of the units must have been conveyed to purchasers. Relative to this, note that most lenders can approve a unit in a completed “phase” of a condo project, even if other phases are not complete.
Control of the association must have been turned over to the unit owners from the developer.

Although not all-inclusive, these are the “hot button” items that lenders look for when approving a condo unit in an established condo project. Lenders obtain this information from data collected in the appraisal, & also from a completed “condo questionnaire”, which the lender sends to the association or their management company. Buyers will need to be prepared to be charged $75 to $200 by the association to complete the questionnaire.

In addition to the requirements noted above, there is also criteria that can make a condo project ineligible for conventional financing. Some (but not all) of these criteria are:

Projects sold with excessive contributions from the seller.
Fractured interest projects, such as a time share.
Continuing Care retirement communities.
Hotel, resort, or houseboat communities.
Projects with multi-dwelling ownership (one deed covers more than one unit).

All of this seems like quite a tall order! The good news is that most (but not all) associations & management companies understand these requirements & structure the association accordingly. One of the more common roadblocks related to the above requirements is when a developer simply did not or could not complete a condo project. This was VERY common during the real estate implosion of the last decade. In other words, if a project called for 120 units, & the bottom fell out of the market after 70 units were built, it did not make much sense for the developer to complete the other 50 units if they could not sell them. Lenders will simply not put a conventional loan on units in such a condo project. The good news is that this can be cured in two ways, & without completing the “un-built units”. First, the master deed could be amended to state that the completed 70 units now comprise the entire project, & the other units are simply removed from the plan. The other solution is to “re-phase” the project, again by amending the master deed. In this solution, instead of all 120 units being one phase of the project, the master deed could be amended to state that the 70 completed units make up “phase 1″, & the unfinished portion becomes “phase 2″. As noted earlier, most lenders can approve financing for units in a completed “phase” even if the rest of the phases are not completed. These solutions require legal guidance, along with the “go-ahead” from the association. Although not always a quick or easy solution, amending the master deed is typically more feasible than completing the unfinished units.

In upcoming posts, we’ll review other aspects such as how the down payment can impact these requirements, government loan financing, & non warrantable condominium financing. Thanks for reading & stay tuned!