Let’s look at common lender red flags you may encounter when trying to purchase a condominium. And yes, it’s Day 4 of “Condo Week” on the Sacramento Appraisal Blog.
Five potential deal-killers for condo loans:
1) The owner-occupancy rate typically needs to be above 50% for both FHA and conventional loans.
2) If there is pending litigation against the HOA, it could be a deal-killer for the loan.
3) If the HOA does not have a sufficient budget or there are HOA fee delinquency rates above 15%, that’s not going to be good for your loan.
4) If you are getting an FHA loan, make sure the condominium complex is on HUD’s approved condo list.
5) No more than 10% of units in a complex can be owned by a single owner.
I asked Senior Mortgage Advisor Chad Focht to give us a little more insight from the trenches of his experience in condo lending.
The biggest misconception that most people have about condos is that if it’s not on FHA’s list of approved condos, there is no way to do an FHA loan with that condo. Here at Mason McDuffie we have a special department that focuses on condo lending and helping buyers and realtors navigate through the unique aspects of condos loans. When a condo isn’t approved, we can do what’s called a spot approval. The process works much like an underwriter approving a loan. We will gather all the needed documentation and look at the project to make sure it’s a healthy and successful project. The last thing that we want is one of our buyers purchasing a unit in a complex that isn’t collecting enough funds (HOA dues) to support the maintenance and repairs or isn’t putting enough money into their reserve accounts. If the condo is on the FHA approved list already, it’s actually a quick and simple process to complete the loan. Here are a few things we need to verify: 1) To make sure the complex isn’t involved in any litigation; 2) That the delinquency rate is below 15%; and 3) That there is proper insurance on the condo project. This is something we collect for everyone to make sure everything is in order. If you have any questions, call my cell at 916-798-1234, office at 916-266-4181 or connect with me on my website.
What other condominium loan issues have you encountered? Your comments, insight and questions are welcome below.
If you have any real estate appraisal, consulting, or property tax appeal needs in the Greater Sacramento Region, contact me at 916.595.3735, by email, on our appraiser website or via Facebook.
Besides the ones you mentioned, I frequently have buyers that fall in love with a condo (and the low price), but fail to account for the HOA’s. In turn the HOA fees take them past what they qualify for in a loan.
That’s a bummer, Keith. The HOA fees could be pricey too. I know a comlpex in Citrus Heights with $300+ fees (very basic complex – nothing fancy).
I live in a planned community Palmetto Bluff, SC with over 700 Single Family Homes. Within this development there are 4 owner occupied FEE SIMPLE Condos. The community will not build any more like these original 4. I am refinancing this and everything has been approved including my condo association docs other than the appraisal. The bank called for three appraisals. Two listed SF homes as comps because the other three condo’s have never resold since being built 12 years ago. There are no other condo’s like this. The only other condo’s for comp are 30 minutes away in Sea Pines community and are completely different market place. The third appraisal used only condo comps from there but are in a completly different market place. Why can’t we use Single Family homes in our community for comps? Does Fannie Mae never make an exception to this rule? The realtor said it should be no problem to compare our condo with SFH because they are fee simple.
Hi Dana. It’s important to compare apples to apples. A condo is a different animal because the land underneath is not owned entirely by the owner and the owner only owns halfway through the attached walls. There can be a big value difference at times when we compare condos with other single family detached homes. Technically speaking a condo is a single family home, but it’s a different type of ownership with the land and structure.
Part of the issue here is there could be a big value difference in light of the extra HOA fee in the condo or the difference in ownership that probably means the single family detached owner has more land.
With all that said, you did call this unique unit a condo still, so maybe it’s a site condo? Ultimately it’s ideal to compare whatever you have to other units like it. If there are no recent sales then an appraiser is going to have to find a way to justify value. Maybe that’s looking at really old sales. Maybe that’s looking at other areas where we might see a trend.
Ultimately if you have a community with very few condo sales it gets tricky to value. But the solution isn’t simply looking to single family detached homes just because there are no recent condo sales. The appraiser may have to go back much further in time to understand the market or go out further also to other developments. I realize other developments are not nearby, but there has to be a way to justify value rather than quickly choosing three recent single family detached sales that may or may not compare well with the subject property.
Hang in there.