Lenders Steer Clear of Blackballed Condo Buildings
Condo buyers who sat out last year’s real estate market, waiting for prices to bottom or their own financial footing to improve, find themselves in an enviable situation.
Prices have plunged, and mortgage interest rates, while slowly rising, remain near 5 percent, creating the best home affordability in decades for consumers who qualify for loans.
There’s just one problem. It’s not just the borrower who has to be up to snuff; it’s the building, too, and there are buildings that lenders won’t touch.Among the deal killers: too many renters in a building, pending litigation, inadequate association reserves and delinquent assessments.
Those are some of the criteria lenders must look at in order to sell the loan to Fannie Mae or Freddie Mac, the troubled, government-sponsored entities, and the Federal Housing Administration, the first choice for many first-time homebuyers. Combined, the three agencies account for about 90 percent of the secondary loan market.
New FHA lending rules for condos could stall the housing recovery: Restrictions open door to heavier weight being placed on owners. In February 2010, the Federal Housing Administration passed a new set of lending guidelines that removes the long-standing spot approval process for FHA-insured condominium loans, and enacts stringent new requirements for projects to be approved on a property wide basis.
While these new guidelines purport to make the loan approval process simpler, they will dramatically reduce the market for the glut of unsold and abandoned condominium units.
FHA used to offer spot loan approvals on individual condo units, but now entire buildings need to be FHA-approved. With its attractive 3.5 percent down-payment requirement, new and existing developments have lined up to apply for that certification, for which they have to reapply every two years.
These regulations cast an extremely wide net. It is currently estimated that the FHA insures more than 20 percent of all loans. FHA-backed loans are attractive to buyers â€” they have lower down payment requirements and often better lending terms.And in some areas of the country, especially in metropolitan and resort areas, condominiums account for a large percentage of the total home marketplace. It is believed that condominium speculation was a large contributing factor to the housing bubble and crash, and a huge backlog of units remains unsold.
The following are some of rules must be met by the condo building for a condo buyer to be approved for an FHA loan:
1. Maintain a reserve equal to 10 percent of the annual budget.
2. Make sure that no more than 15 percent of owners are more than 30 days late on condominium fees.
3. Assure that no more than 10 percent of the units are held by a single investor.
4. Have no more than 25 percent of the space used for commercial activity.
Real estate agents and lenders say they are seeing more developers, condo associations and individual owners in economic distress, and, as a result, so are buildings.Many lenders maintain a frequently updated list of blackballed condo buildings, where they know a loan won’t get approved. They also are working with homeowner associations to improve their building’s lending potential by improving financial reserves and limiting the number of condo units that are turned into rentals.
Several years ago, there was an assumption that every condo building would pass scrutiny, but that’s no longer the case, said Jim Linnane, Northeast division sales manager at Wells Fargo Mortgage’s retail sales group. Wells Fargo has a dedicated group of employees whose job it is to dig into the financial details of a condo development and work with borrowers and buildings to meet agency guidelines.
The situation is slowing any recovery of the condo market, often the housing of choice for first-time buyers. Owners in troubled buildings aren’t able to refinance, and sellers who want or need to sell find thin ranks of buyers.The requirements are thwarting the plans of some potential purchasers, who have abandoned their searches and remain renters.
Some lenders will look past a problem in a building and still offer to take the loan and hold it in their own portfolio, but that acceptance comes at a price. The borrower’s credit has to be stellar, they have to make a sizable down payment, and the loan will carry a higher interest rate. As an Exclusive Buyer’s Agent I would caution my buyer against considering an investment in such a building since the risk of in-ceased fees is a real exposure, buying into a building that is becoming a “renter’s building” will devalue the property and make it more difficult to sell it in the future, on-going services and amenities may be reduced, etc. If a lender is protecting themselves from investing in a “risky building” so should the buyer.