If you want to buy a condominium unit, and you’re not paying cash, this article is for you.
If you finance your condominium with a Fannie Mae, Freddie Mac, VA or FHA home loan (between them they have 94 percent of the mortgage market), your condominium project must meet the guidelines of the corporation or government agency that backs your loan. Here is what you need to know to buy a condominium.
The biggest obstacle for condo buyers is the shortage of approved developments. According to industry estimates, only about 20 percent of formerly-FHA-approved projects are still approved for FHA financing. Before the mortgage crisis, if a condominium community was not approved for FHA financing, buyers could submit their unit for “spot” approval, meaning the entire development did not have to be approved. That’s not the case today.
While Fannie Mae has streamlined the process by which condo developments can obtain approval, the reality is that very few projects are approved. To see if a condo you’ve got your eye on is eligible for Fannie Mae or Freddie Mac financing, you can find a list online. Don’t be surprised, however, if your state has just a handful (or even zero) of condos listed.
If you want to buy a unit that’s not on the approved list, you may be able to request a “limited review.” A limited review is conducted by the lender – it’s just a questionnaire that’s completed by the property manager or head of the homeowner’s association. To be eligible for a limited review, you must put down at least 10 percent for a primary residence or 25 percent down for a second home.
Limited review criteria are:
Projects ineligible for a limited review are subject to a “full review.” The guidelines of a full review are stricter:
a. Compliance with laws
b. Limitations on ability to sell or first right of refusal
c. Amendments to docs
d. Rights of mortgagees and guarantors
e. First mortgagees rights
f. Unpaid dues
g. Minimum square footage of unit is 400 square feet
Limited and full project reviews have a duration of 180 days.
FHA condominium approvals are more straightforward. You can look up a condo’s approval status on HUD.gov. Projects that meet FHA standards can be submitted for approval directly to the FHA, or they can be approved by “Direct Endorsement” FHA lenders which have been granted the authority to make that determination. If a condo project is submitted for FHA approval, the process generally takes about 30 days.
For condominium buyers seeking VA home loans, the VA maintains a searchable database of approved projects on its website. Lenders must submit a written request for VA-approval to the VA and a copy of the condominium’s organizational documents. The VA examines the condominium’s organizational documents for compliance with VA regulations, and notifies the requesting lender/sponsor within 30 to 90 days. To speed up the process, the VA recommends that lenders or homeowners supply an attorney’s opinion stating that the community meets VA guidelines.
If you’re financing a condominium purchase, plan on a longer processing time. Lenders have to assemble a lot of paperwork and conduct interviews before submitting a package to the authorities who approve projects for mortgages. It can add 30 to 90 days to your escrow, and this should be considered when you’re deciding to lock in an interest rate. The good thing about the requirements for condo approval is that, by refusing to lend on riskier properties, mortgage lenders protect you at the same time they protect themselves.
Article written by Gina Pogol and found on HSH.com
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