By Joseph McBreen
New construction financing is available with all the standard conventional, jumbo and government loan programs. With a single family home or a detached townhome or PUD, there are no specific guidelines, which can create a problem with financing, assuming the buyer meets standard credit qualifications with respect to credit scores, down payment and income.
Most new construction questions arise with newly constructed condo projects. Fannie Mae has been a leader in setting industry standards for condo eligibility. In the past, the lending industry depended on Fannie Mae’s project review service, but as the market conditions for condos have deteriorated, lenders have less confidence than in the past about lending on units in new projects. Fannie introduced an updated project review service (PERS) in early 2009 to help provide confidence to the lending industry. Fannie Mae’s project standard team can be reached via email at email@example.com or 800.752.6440 with any questions.
Buyers and agents might be confused with new lending rules, but there are seven very important guidelines in relation to new construction condo financing that agents and their clients need to be aware of:
- The project needs to be 70 percent pre-sold and have at least 51 percent owner occupancy. REOs that are bank owned, for sale and not rented out are counted in the owner occupancy percentage.
- Associated reserves typically need to be 10 percent of the annual budget.
- No more than 15 percent of the association dues can be more than one month delinquent.
- A single entity cannot own more than 10 percent of the condo project.
- The association must obtain Fidelity Insurance on the project to protect the association funds which includes HOA dues, 10 percent reserves, special assessments and other amounts collected for the cost of insurance and repairs etc.
- The unit owner must purchase additional hazard insurance (“walls–in coverage”) beyond that provided by the associations master insurance policy.
- The builder or seller cannot pay any HOA dues on behalf of the buyer as mortgage loans with payment abatements are ineligible for delivery to Fannie Mae.
Lenders are responsible for the accuracy of all information submitted for review and for all selling representations and warranties and the typical turnaround time for new condo project review is 10 business days after the lender submits a complete package for review. Lenders are notified via email of the project eligibility, ineligibility or suspension pending additional information.
Educate clients about these seven things and perhaps financing new construction will be smoother.
While this article covers the basics for what agents and their clients need to be aware of when looking at new construction condo units, please don’t hesitate to contact me for my knowledge and experience in condo lending in Chicago and other markets in the US.