Condominium Financing Questions

I get asked a lot questions on the topic of Condominium’s and the

financing of these projects. There have been changes over the years;

Fannie Mae and Freddie Mac have classifications for condos as

“warrantable”, “non-warrantable” and Condotels. Warrantable projects

is simple, it infers that it meets the guidelines for Fannie and Freddie

and therefore suitable for financing.

However a non-warrantable or condotel project has traits such as: the

HOA participates in and/or earns money from the rental of the

individual units. The HOA’s website facilitates rentals of units in the

project.

The homeowner’s association dues are over 15% delinquent (most

likely due to short sales or foreclosures); there is a rental desk onsite

that is owned/manned by the HOA; the units have keyless entry, daily

maid service is provided, etc. It doesn’t matter whether the unit will

have one or more of these traits or not; they base their approvals on

the entire project.

We do have a process that allows us to approve individual loans in

condos on a case to case basis for non warrantable and described

above condotels (even those that allow nightly rentals).

But HOA cannot have a large deficiency/past due HOA fees.

To get a higher loan to value (putting less money down) the project

should have a higher percentage occupied by the owners or be the

owners’ second home; it cannot have an excess of “investment units”

(these are units that the owners never occupy and that are rented

only).

Although some of the condominium property requirements may appear

arbitrary, the rules exist to protect both the borrower and the lender.

Rules are different for small properties (two to four units) versus large

properties; there are different rules for new construction and new

conversions and the rules can change with jumbo versus conventional

financing.

I will not get into the specific rules here but will cover the general areas

that are reviewed for condo approval.

Owner occupancy: Lenders want a high level of owner occupancy in all

condo associations. Owner occupants are considered more likely to

maintain their property, pay all fees on time, and manage assessments

or fee increases if required. Statistically, investor owners will stop

paying their fees and even the mortgage if their personal finances get

snarled, which can weaken a condo association.

One owner with a high percentage of ownership: One unit owner

cannot own more than 10% of the total units. For the reasons outlined

above, if one unit owner owns a high percentage of units and fall upon

hard financial times, the entire association can be at financial risk if that

owner stops paying their condo fees.

·Adequate insurance coverage: Condo fees include the insurance

coverage for the entire condominium structure. "Walls In" coverage has

recently been added into the insurance requirements for condo units.

Many master policies cover to the walls of the condo unit and

borrowers traditionally would get a more standard policy to cover

fixtures and personal contents. Today if "Walls In" coverage is not

provided by the master policy the buyer may be required to get a small

amount of additional coverage.

There are some other insurance requirements. Our experience tells us

that most associations are adequately insured; it is the "Walls In"

requirement that comes back to us on some loans.

Reserve Funds/budget concerns/litigation: Today condominium

associations are required to have 10% of their annual budget going into

a reserve account; this must be a line item on the actual budget.

Additionally the lender needs to verify that all condo fees are collected

and up to date, no more than 15% of the total units can be past due on

their condo fees.

We are required to verify that there are no pending law suits against

the association that are not covered by the master insurance policy or

any other issues that could negatively impact the condominium

finances.

Commercial use: Any commercial use cannot exceed 20% of the entire

square footage of the subject property.