Condo Loan Craziness

Just because you have good credit, low debt-to-income ratios and a good size down payment, don’t think that qualifying for a purchase mortgage on a condominium will be a breeze. It may not be you that the Federal National Mortgage Association (FNMA) is concerned about. Since FNMA is the likely buyer of the mortgage advanced by your lender, they are fastidious about how the condo homeowners association (HOA) or property management company is managing the affairs of the building.

There are some rules you should know before making an offer:

• If you intend the condo to be an investment property, over 50% of the units in the building must be owner-occupied.
  WHY? Owner Occupants look after their units and are less apt to default on their mortgages
• If the building offers in-room housekeeping and concierge services, FNMA will assume the condo is operated as a hotel and your loan will be declined.
  WHY? Short-term rentals (daily/weekly/monthly) are prohibited – whether offered by the HOA or the unit owners (and if the latter, the HOA will need to police this use)

It is not easy for the HOA to monitor the number of rental units – in which case the appraiser will need to make what is often an unreliable estimate. If this estimate is high, it triggers a red flag in the eyes of the lender. Letters of explanation and verbal confirmations will be required, thereby causing substantial delays and increasing the odds that your loan may not close.

 

Sweet Loan Arrangement for Veterans (Mostly)

The Department of Veterans Affairs (“VA”) guarantees a portion of all VA mortgages. This makes the loan safer for lenders providing these loans. As a result, VA lenders generally charge about one half percent less than the fixed rate on a standard 30-year conventional mortgage. Unfortunately, many veterans are either unaware of these savings and other VA mortgage benefits, or they have forgotten about them.

Since veterans can finance 100% of the purchase price of their primary residence, one might think the loan may be risky. Yet historically, veterans have the best track record for timely repayment – which is not surprising given their unwavering commitment to our country. Most veterans are required to pay a pre-closing VA Funding Fee (an insurance policy to the VA in case of a default), but there is no ongoing monthly mortgage insurance premium requirement – as is the case for conventional or FHA mortgages when the down payment is less than 20%.

But there is one key problem with the program when financing a condo: VA must approve the building and all condo association documents. While this would seem reasonable, most associations reserve the right to approve the buyer. VA views this as an ability to “screen” a prospective purchaser, and therefore discriminatory. Association documents must be revised to delete this approval right, and most condo boards are reluctant to do so (not because of veterans, but because they do not wish to allow the sale of a unit to individuals of ill repute).