Condo Lending Rules and Condo Loans

Many home buyers start looking for condos assuming that the lending world is the same for a condo or a home. It is not. Fannie Mae, the largest purchaser of U.S. loans, has added some requirements that single family home buyers don’t have to be concerned with. Here are some cases where your loan may get delayed, or even denied:

  • New construction condos. New condo developments may have difficulty in getting the project approved for lending, because the major buyer of loans, Fannie Mae, requires 70% of units to be sold before it accepts any loans for condos in the development. Your real estate agent can work with the builder, who often makes special arrangements with lenders.
  • Condos with many rentals. Fannie Mae requires that 50% of all condos in the condo development be used as a primary or second residence. Unfortunately, many homeowner’s associations do not track this well. Good lenders will do the legwork required to get this information even though the Association may not be helpful. When shopping for condos, pay close attention to developments that have their own leasing office, which may mean that the development has a high number of investor-owned properties.
  • Condo developments in trouble. Unfortunately, with the recent real estate downturn in many areas, some condos have been shortchanged of their association fees from deadbeat owners. This causes homeowner fee increases and lower community reserves (the amount of money set aside for major repairs, such as roof replacements, painting, paving, etc.). Lenders may have to delve into the financials of the project to determine whether the reserves are properly funded. FHA lenders require the reserves to be funded up to 10% Also, Fannie Mae requires that no more than 15% of homeowners be delinquent in paying their association fees.
  • FHA and VA Loans. To use an FHA loan to buy a condo, you’ll have an easier time getting an approval if the condo development is FHA-Approved or VA-approved. If the condo development does not have these approvals, then your lender better be willing to spend more time and money to get the approvals needed.
  • Condos with one owner owning more than 10% of the units. As prices fell between 2006-2010, investors jumped in, buying multiple units in one development that found itself with bargain basement prices. Little did he know that he doomed the development from getting any future mortgages! Until lending loosens somewhat, this requirement could cause problems in some communities for years.

When you are planning to purchase a condo, its important to work with a real estate agent who has experience in selling condos. Guidelines are changing often!