January 23rd, 2010 10:48 AM by Richard T. Cirelli
Condo Pitfalls! What You Need to Know When Buying or Selling a Condo:
The condo market is hot right now and the reason is simple - they cost less than a detached home. First-time homebuyers and investors alike are gobbling them up. My pipeline is full of pre-approvals for buyers looking for the right condo to buy.
Buyers, Sellers and Realtors should be aware of certain lender guidelines when it comes to buying a condo. These guidelines are set forth by Fannie Mae and Freddie Mac, the two government-owned agencies responsible for providing mortgage money to all lenders. Therefore their rules apply to all lenders. Be aware of these conditions so you’ll have no surprises.
Here’s what you need to know:
· For existing condominium projects, at least 51% of the units must presently be owner-occupied. If more than 50% of the units are owned by investors, the unit you want to buy may be unfinanceable.
· No more than 10% of the units in a project can be owned by a single entity.
· No more than 20% of a project can consist of non-residential space (such as commercial space).
· No more than 15% of a condo project’s units can be more than 30 days delinquent on HOA dues.
· The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.
· Fannie Mae and Freddie Mac require a .75% add-on fee (this is to points, not rate) unless the buyer makes a down payment of at least 25 percent. Investors will pay an additional 1.75% in points.
· Pending litigation by a homeowner against the HOA or litigation by the HOA against the developer is almost always a deal-killer so be sure to ask if there is any pending litigation.
· Fidelity insurance will be required for condos with 20 or more units, ensuring that homeowner association funds are protected.
· Borrowers must obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
· For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract).
· New projects where the seller (builder or developer) is offering sale/financing structures in excess of Fannie Mae’s eligibility policies for individual mortgage loans. This varies according to the amount financed as a percentage of the purchase price.
How Do We Find Out If a Project Meets the Guidelines?
Lenders and Mortgage Brokers are required to obtain an HOA Certification form from the HOA or Property Management Company. Each lender has their own form but the questions are the same. Some HOA’s make the information available on a website called CondoCerts.com to which we subscribe. There is almost always a cost for obtaining the HOA Certification Form and supporting documents – usually $100 - $200.
In addition to the HOA Certification Form, the lender or broker will often need the projects Covenants, Codes & Restrictions (CC&R’s) Articles of Incorporation, By-Laws, the Budget, and Evidence of Insurance/Master Insurance Policy.
Awareness of these requirements will help to ensure a smooth closing. I encourage Realtors to obtain this information when listing a condominium and for buyers to ask for this information early in their shopping process. I’m always available to help too. Don’t be afraid to buy a condo. Just do your homework. A condo can be a great investment!
What’s Up With Rates This Week?
Mortgage Rates improved a bit more from last week driven by weak inflation data and rising unemployment claims today. Remember, bad news for the economy is good news for rates. In the meantime the debate continues over whether the Government will continue their program to purchase Mortgage-Backed Securities (MBS’s) beyond the deadline of March 31st. It is estimated that the MBS purchase program is responsible for keeping mortgage rates artificially low by about 1%.
Please feel welcome to forward this information on to your clients, colleagues and friends. I value your feedback too.