The condominium is a great type of property. It provides the joy of ownership with minimum amount of maintenance, but it is also a type of property that strikes a bit trepidation into the heart of lenders. Think of it as the difference between running the 100-meter hurdles versus a simple 100-meter dash. You get to the end of both races, but one definitely has more complexities.
New Development Condo Buildings Differ from Existing Condos
When you are looking at condominiums, you need to understand that there are inherent difference between new condo developments and existing ones. New developments are, in the eyes of a lender, more risky than pre-existing ones. The guidelines for these are even more stringent and your lender may be hamstrung in the programs they can offer. There are very specific guidelines as to the required number of units sold, the number units completed and the degree of completion on the common areas. These items will also be reflected on the condo questionnaire, so you need not worry about assembling the data. You do need to understand, however, that choosing a new development may reduce some of your options or possibly even render the unit more expensive if you end up needing a niche program that allows for greater variance on guideline requirements.
It is very important to know who lives in the building and who owns the other units. This goes well beyond affecting your quality of life after moving in. It actually has a great deal of impact during the financing of the property. Your lender will require that a condominium questionnaire be completed in conjunction with the transaction. This will allow them to assess whether or not the building is Fannie Mae or FHA approved, whether there is any litigation associated with the building, the number of units that are rented, how many are delinquent on association dues, how many units are in foreclosure and even how many units are owned by a single entity. All these statistics map onto the guidelines that the building must meet for a loan approval. While not your responsibility, the information is incredibly important to the lender. Your lender should request this be completed prior to going to contract as it allows them to know if they can lend on the property. Without this information, your lender could be setting you up for failure during the loan process.
A Poorly Maintained Building Can Cost You
I am going to go out on a limb and suggest that you would not likely buy a car that had a large amount of deferred maintenance on it. If in fact you were going to buy the car, you would consider the cost of the fixing any deferred maintenance issues into your purchase price. Condominiums have very real parallels to the aforementioned analogy. Because the building or common areas are jointly owned, the individual units pay into a treasury for repair and upkeep. There are times, such as a bad economy, where the maintenance is deferred until it is less of a hardship and these deferred maintenance items can build up. From a financing standpoint, you want to make sure that you are not setting yourself up for a slew of special assessments to be levied against your unit after you move in.
The Condo Declarations, Rules & Regulations Matter
When you buy a unit in a building, you and your lender are now a party to all of the joint ownership aspects of the building. Rules can be as benign as what you can hang on your outside door and as major as whether or not you can rent the unit. Additionally, issues like right of first refusal on the part of the condominium association can actually kill a deal if the lender’s guidelines do not allow this. By understanding and addressing these possible obstacles early, you and your lender can better understand whether or not the loan can actually be done.
Condo Loans Can Cost More
Lenders make their decision based on risk. In their eyes, condos represent more risk than single-family homes and therefore require more stringent approval criteria. As a result, everything from the loan size to the allowable qualifying ratios for buying a house may not be allowable for a condo. Even if allowable, the cost of the loan, i.e. rate and fees, for you will sometimes be higher as the lender needs to account for the added risk with a greater return on their money.
All in all, this article should not quell your desire to own a condominium. As I said at the beginning of this article, a condominium is a great option for home ownership. It offers a great many advantages to owning a single-family home, but with these advantages comes constraints. Like the athlete I alluded to in the opening, you just need to identify and overcome the hurdles to cross the finish line and reach your goal.