Considering a Condo? Beware of the Pitfalls
The condominium lifestyle has many benefits: affordability, location, community, security, low/no maintenance and common amenities. These features offer a perfect fit for many people looking for something simple.
One aspect of condo life to consider before buying is the restrictions placed on a lifestyle — from choice of window blind colors to the hanging of holiday decorations. A representative from the HOA (Home Owner’s Association) often can even enter your unit to evaluate any potential violations after receiving complaints from other residents and enforce the rules accordingly. Your Realtor® needs to educate you thoroughly so you go in with eyes wide open.
More importantly, financing a condominium is a much more complicated process than buying a single family home as there are extensive rules and regulations that dictate not only the purchase of a condo, but also its ownership and even impact its resale value. Keep in mind, a townhome may be treated as a condo or it may treated as a single family home and that factor can have a significant impact on your ability to obtain financing.
When searching for a condo, you need to work with a Realtor who understands the financing complexities and how to avoid the pitfalls. A very busy Island lender has to tell 1 in 4 condo buyers they won’t be able to purchase the unit they just signed a contract on. I would not let you become the one who gets that kind of bad news.
There are many factors that can impact your ability to finance a unit run by an HOA, which need to be considered before shopping for a condo.
This type of transaction must make a perfect match between buyer and property. Keep in mind that even with pristine credit and large down payment, while the lender may not be worried about, they may be worried about your HOA. Lenders are increasingly wary of approving mortgage loans for developments that have too many rented units, skimpy cash reserves, an inadequate insurance policy or costly improvements looming.
And while a small red flag may be easy to fix quickly before closing on a purchase of single family home, these same issues will likely kill a condo deal because of the challenge in fixing them.
A strong buyer can mean the lender will be more willing to take on the risk of lending, especially if the HOA is very well run. Every HOA should have a recent report from their last Property Review and also the minutes from the last two board meetings to show what they are discussing in response to it.
If the lender’s own review process of the development’s financial and physical health determines the monthly dues and amount of cash reserves is insufficient to cover future expenses, they will likely reject your loan application.
Financially speaking, a vote by the HOA could increase the monthly dues to prepare for changes in the MOR (maintenance, operations and repairs). This means your housing budget may increase over time, even if you voted against it.
Worse yet, if a large and unexpected cost needs to be paid, there could be a Special Assessment charged to each unit. I can share horror stories similar to the one where condo owners learned a lien was recorded on their deed until they paid off a $20,000 bill for their portion of a new elevator, even though they lived on the ground floor.
If a lender doesn’t believe you are in strong enough financial position to cover the potential increased costs, they also may reject your loan application.
While a lender might not mind if one neighbor is suing the HOA for an exception to a specific rule, it will mind if the entire HOA is involved in a larger suit. If the association is suing a contractor for a failed project such as a new roof that leaks, for example, then the lender is unlikely to fund a loan if the complex has an uncertain outcome looming over its finances.
While it may be appealing to have a coffee shop and other retailers on the ground floor of your complex it could impact financing options: the percentage of commercial occupancy of the entire complex will be eyed closely by a lender. And whether or not the business tenants have their own HOA separate from the residential tenants makes a difference too. Regarding residential tenants, buyers and lenders need to know what percent of units are owner-occupied and how many are rented out. This is because owners tend to take better care of their properties. Lenders typically have limits on how many units can be rented too and will reject a loan application if the development doesn’t fit their criteria.
Even if you think this is going to be your last purchase, it is best to have a Plan B and know you should be able to sell the property easily. The most important thing to consider is maximizing the number of buyers who are eligible to purchase it from you.
This means choosing a development that is not limited to cash buyers and does qualify for buyers using ‘Fannie & Freddie eligible’ financing options for condos. Lenders classify condos as “non warrantable” and “warrantable” and only one of these is best suited to attract a wide range of buyers.
The fastest way to avoid falling in love with a new home you can’t finance is to talk to your lender first – even before you begin your condo search. Lenders that have experience with condos can often provide you with a list of developments approved for financing or let you know if the one you are thinking about will match up with your financial criteria.
In collaboration with your lender, I can get to work screening developments so you know up front that you have a green light when it comes to the condo being eligible for conventional and/or FHA financing. I will ask the tough questions early in your search process to ensure you don’t waste time shopping for properties that you won’t be able to buy.
To learn your options based on your financing scenario, or for a referral to one of the best mortgage brokers around, contact me at [email protected] or 206.399.3641.