For this issue’s Ask a Lender, Joe Burke, a vice president of mortgage lending with Guaranteed Rate, answers questions posed by Chicagoland Realtors.
Q: I have spent countless hours and marketing dollars on condominium listings this year, only to find out on more than one deal that the condominium associations are not eligible for conventional mortgages. Is there any way to avoid this?
A: It has long been the norm to prequalify our potential buyers, but the same can’t be said of the properties themselves, and that needs to change. It is the logical next step these days when so many condominium projects are not currently ‘warrantable’ by Fannie Mae and Freddie Mac.
When a mortgage application is taken and the property or collateral is a condominium, the loan application is basically split into two separate underwrites. The first is the borrower package, consisting of income, assets and credit. The second is the condominium package, which is deemed by Fannie Mae and Freddie Mac standards as either warrantable or non-warrantable. If the condominium project is deemed non-warrantable, it is difficult, or even impossible, to obtain financing.
So, how can this be avoided? By prequalifying your client’s condominium association. While there are variances from lender to lender, some are more conservative than others when interpreting guidelines, there are 10 questions that can be asked up front that should give you a reasonable idea if there are going to be any problems that crop up during the mortgage process:
- Is there a ‘Right of First Refusal’ in the condo declarations?
- Does the project allow for a buyer to purchase more than one unit with a single mortgage?
- Is the condo association currently involved in any litigation?
- Does the project contain any commercial space? If so, what is the square footage?
- Does any single entity own more than 10 percent of total units in the project?
- Are more than 15 percent of the total condo units 30 days or more delinquent on their monthly assessments?
- Is the project a condotel, have a rental desk, daily or weekly rentals?
- Are there any special assessments currently approved, or have there been any in the past year?
- If a unit is taken over in foreclosure or “deed-in-lieu,” is the mortgagee responsible for the delinquent HOA dues?
- Does the budget call for at least 10 percent of the operating cost to be put into a reserve account as a line item in the budget?
Some of these questions can be deal killers if you get a “yes.” Others can be harmless to the transaction with the right documentation. And a few, if apparent up front, can be corrected before the unit ever goes on the MLS. But they will all become a problem during the underwriting process at some point if you don’t ask the questions up front, because the lender will.
As a Realtor, it has never been more important to have a strong relationship with a loan officer, who can help to prequalify your clients’ properties before the MLS. When a challenge presents itself prior to listing, everyone in the transaction can be prepared, the listing can be priced appropriately and potential borrowers can be targeted appropriately.
Q: If my client’s condominium association is deemed “non-warrantable,” are there any financing options available?
A: Yes, Guaranteed Rate has access to lenders that will finance a non-warrantable condominium project, but they won’t necessarily finance any non-warrantable condominium project. For instance, if it’s the owner occupancy that is an issue, there are lenders that will allow financing in the project. They will generally require a higher down payment and have a more limited product array, but are still generally very aggressive when it comes to interest rates.