A: One misconception that both condo sellers and buyers have is that they believe the buyer’s credit approval – the review of income, assets, credit history, etc. – is the only approval that occurs in the process. In reality, there is also the necessary review and approval of the condo development itself. For a conventional (non-FHA) conforming loan, there are two types of condo approvals that you should be aware of so that you can better educate your clients: a full condo review and a limited condo review. The full condo review is needed for the following loan scenarios: all condo purchases as non-owner occupied (investment) properties; a condo purchase for a second home with a loan to value (LTV) higher than 75 percent; and a condo purchase as a primary residence with an LTV higher than 90 percent. A limited condo review is needed for second homes with an LTV of 75 percent or less and primary residences with an LTV of 90 percent or less.
The full review is more in depth and requires the review of a condo questionnaire composed of 27 yes-or-no questions that need to be answered by a member of the homeowners’ association or the association’s management company. The declarations and by-laws need to be reviewed, as does the association’s most recent fiscal year budget and the association’s insurance coverage.
A limited condo review is less detailed, and generally entails only the review of a questionnaire composed of 10 yes-or-no questions, the association’s insurance info and the budget. It would be prudent to educate your client to the fact that while the buyer needs to be approved for financing, the development itself will need to be reviewed, as well. It would be ideal to make this a part of the initial consultation that you have with your client, and I would recommend that early on you have them obtain a condo questionnaire that is filled out by the association or management company to ensure that the development will meet the guidelines. While there isn’t room in this article to go through all of the details regarding a condo approval, I’m more than happy to do so over the phone, via email or in person, and/or to provide our standard condo questionnaire for reference.
Q: I have a buyer who needs to utilize FHA financing due to lower credit scores and minimal funds for a down payment. If they are interested in a unit in a development that is not FHA-approved, are they out of luck?
A: The short answer is no, they are not out of luck. The longer answer is that the building would need to be approved for FHA financing. We have the ability to approve condo developments for FHA financing in-house at Guaranteed Rate, and I’ve personally worked on a number of these.
The first question that needs to be asked is whether or not the association wishes for the building to become FHA-approved. If it does not, then there is little to be done, because we need to collect a number of documents that can only be provided by the association. If, however, the association does want the building to become FHA-approved, then it is a matter of collecting the necessary documents and questionnaire from the association. This is a great option for buyers who require an FHA loan but cannot find a unit that they like in a development that is currently FHA-approved.
Q: What type of financing options do my buyers have if they are looking to buy a condo, but only have 5 percent down?
A: There are quite a few, actually. The interest rates we have on a 95 percent LTV condo loan are currently extremely low, be it a fixed-rate loan or adjustable rate mortgage. In fact, depending on a number of assumptions with regards to the buyer’s credit, the rates may only be a 0.125 percent to 0.25 percent higher than a loan on a single-family detached residence with 20 percent down. There would be private mortgage insurance (PMI) associated with this type of loan due to the buyer putting down less than 20 percent, but the PMI rates on these programs have been decreasing as well, making these excellent programs for buyers with a lower down payment.
Kyle Gillespie has been with Guaranteed Rate since August of 2005. He has closed over $150 million in loan volume over his career, and he has received customer service awards every year he has been in the business. He specializes in providing low- to no-closing-cost options for both new buyers and those who are refinancing. Kyle can be reached by phone at 773-435-7939 and by email at [email protected], and His website is www.KyleGillespie.com.