Condo Associations are becoming heavily scrutinized.
We have all heard of the difficulties in procuring a residential mortgage – from the need for high credit scores to the down payment requirements. The new qualification paradigm for obtaining a mortgage can shine a bright spotlight on any buyer looking to make a purchase in today’s real estate market. In terms of condo financing, the spotlight is often focused on the particular “Association”, as well as the buyer, in today’s lending arena. Philadelphia condo associations and buildings must jump through additional hoops in order to pass the test for financing- An additional step in the qualification process that is outside of any buyer’s control.
Some of the more common road blocks that make any given condominium difficult to finance:
Owner-Occupancy Ratio must be at least 50% – If there are more tenants/investors than owner-occupants, the unit may not be able to be financed with just 10% down. “This is probably the most common reason a lender will not finance any given condo building”, says Jason Griesser of Trident Mortgage. “Owner-Occupancy ratios are key to financing a condo”.
One entity owns more than 10% of building, like the original developer or a single investor. This will generally signal to a lender that the project may be more rental based than owner-occupant based, and loans for such properties are often rejected by underwriters for lenders.
Commercial Space – If there is more than 25% of the building that is zoned or used as commercial space, many lenders will balk at loaning on such condo buildings. “I see this issue on many low rise styled condo conversion projects here in Philadelphia, particularly in the Brownstone styled condos”, says Zachary Skidmore, a Realtor in Philadelphia.
Lawsuits – If there are ongoing lawsuits either against the building or the association, or if the association has initiated a lawsuit against, say the developer, such actions can hamper the lending process on the condo building. Lawsuits raise an immediate red flag to lenders.
FHA Mortgages- One Third of the building must be sold or under contract,
and if the building has not secured prior FHA approval, “spot” approvals are no longer allowed- the building must go through the FHA condo approval process in its entirety, according to the Fannie Mae website.
Association Reserves and Insurance- Generally, lenders will scrutinize the Association to assure that there is at least 10% of the annual budget in reserves, and the Master Insurance Policy must have a Fidelity Bond rider, which protects the association against any Condominium Board member who may have sticky fingers and decide to run off with the reserves the building has accumulated.