Refinansiering: Condominium Housing Loans can be a Huge Challenge

New Rules: Warrantable & Non-Warrantable Condo Mortgage Loans

If you think qualifies for a housing loan for single-family houses are a challenge? It would be best to try applying for a housing loan to purchase a condominium. Not only will borrowers need to qualify for the debenture, proving to financial institutions like conventional banks, credit unions, or online lending firms that they can afford their monthly amortization and that they have a long history of paying their bills on time. 

The Homeowners Association running the condominium building where they want to purchase also should approve the sale. It is that second part that gets very tricky: People have control over their own financial standings. They have no control over the financial skills of the association running the condominium building.

Get ready to do the dirty work

Condo associations and buildings need to meet certain requirements to get approved by financial institutions like the Federal Housing Admin, Freddie Mac, or Fannie Mae to be eligible for debentures or refinansiering backed by these organizations. 

And if a condominium building is not approved for financing by these organizations, finding a reputable lending firm that will provide borrowers a housing debenture for a unit in that establishment will be a huge challenge. According to experts, the additional hurdles will make life harder for individuals, but these processes can also provide the protection that financial institutions need. 

Financial institutions like Freddie Mac need the lending firms they work with to check the condominium associations to ensure that they are financially stable and have enough or the right insurance coverage to cover any unexpected loss and damages. The property is in excellent condition. People expect lending firms to put emphasis on evaluating properties as collateral as it does during the underwriting process of the borrower’s creditworthiness.

The rules

Listed below are some examples of how tricky it can be for condominium buildings and their association to qualify for financing from financial institutions.

  • No more than fifteen percent of condo buildings’ owners can be late on their monthly dues
  • More than half of the condo units in the establishment need to be owner-occupied
  • No owner can own more than ten percent of the property
  • All of the property development’s amenities – from fitness centers to pools – must be completed if it is more than one year old
  • Even if the building does qualify for financing from financial institutions, they will need to come up with a bigger down payment compared to if they were asking for a home loan for single-family houses. If they cannot come up with enough down payment (usually 25% or more of the unit’s purchase price), they should pay huge penalties: at least 0.75% of the debenture amount at the closing or a higher IR of about 0.25%. These guidelines hold true for most financing from Freddie Mac

If the person is paying two hundred thousand dollars for their unit, that 0.75% penalty comes out to one thousand five hundred dollars at closing.

To find out more about the history of condo projects, visit https://www.fosters.com/story/business/columns/2019/10/17/history-of-condominiums/2506133007/ to find out more.

The Federal Housing Admin route

What if people want to take out debentures insured by the government or the Federal Housing Admin (FHA debenture)? Again, the building will need to meet specific rules; most of these rules are similar to the requirements enacted by financial institutions like Fannie Mae and Freddie Mac.

  • At least half of the units in the establishment should be occupied by unit owners and not renters
  • No more than 15% of owners can be delinquent on their association fees
  • There should be no ongoing litigation against the association
  • The association’s cash reserves need to be higher than or at least equal to one year’s worth of the organization’s fees

There are benefits to taking out FHA loans to finance condominium purchases. One of these benefits is that if the person has a good or excellent credit, the Federal Housing Admin requires a down payment of just 3.5% of the unit’s final purchase price.

Refinance Your Condo: Rates And Guide | Rocket Mortgage

Frustrating searches

The bad news is that finding a building approved for a Federal Housing Admin financing can be a hard task. According to reports, in 2014 alone, only 10,000 condominium projects in the country were approved for the Federal Housing Admin financing. 

That is a small number when we consider that the number of condominium projects in the country at the time was around 144,000 on average. Properties that are not approved by financial institution financing are known as non-warrantable. It is not easy to get housing loans for these types of units. 

People will need to find a conventional bank or lending firm that is willing to lend the borrower funds even with the knowledge that Freddie Mac or Fannie Maw is not interested in purchasing the debenture from them. It is pretty hard to find lending firms willing to do this. 

And even if people do find them, they will need to come up with a significant amount of down payment to provide financial protection to the financial institution, maybe at least fifty percent of the property’s sales price. People will also need a good to excellent credit. 

Lending firms today consider a credit rating of at least 740 to be an excellent rating. People can expect to need scores that high if they want to get financing from lending firms for non-warrantable units. They also need to make sure that their monthly obligations – including their new estimated home debenture payments – are not more than 43% of their gross monthly income (income before taxes and insurance are deducted). 

According to experts, it is not rare for homebuyers to get disappointed in their search. They might find an excellent unit only to discover sooner or later that the establishment’s homeowners association is involved in various litigations. In these cases, no lending firm is going to lend them money for that unit. 

The same is also true if the association does not have enough reserves and is otherwise found to be mishandling or mismanaging the money it collects. But property buyers should not be too upset when financial institutions refuse to allow them to purchase the property with a struggling association. 

Why would an individual want to give their hard-earn money to an organization that is not doing its job of managing its funds? Even if people love the property, they do not want to get involved with poorly managed homeowners organizations. It is just too much stress and pressure, no matter how good or nice the unit is.

Cash purchases are very common

Of course, people can purchase any property they want if they pay in cash. It is why so many condominium sales today are done on a cash basis. People do not have to worry about how many condo units are owned by one resident or the number of renters the establishment holds. 

People just have to use their saved cash. According to economists, at least 55% of the condominium sold in the United States were bought using cold cash. That compares with 39% of all residential properties during the same period that was bought in cash transactions. 

Cash sales were pretty popular in the state of Florida. According to studies, at least 80% of condo sales in Orlando were bought with cash. In West Palm Beach, the figure hit 82%. In Fort Lauderdale, it was 81%. The bad news is that not all condominium purchasers have enough cold cash to buy units without first getting a housing loan. 

Suppose people need to finance a condo unit today. In that case, people need to remember that finding a condominium building approved by the Federal Housing Admin, Freddie Mac, or Fannie Mae is the main priority. Then people should be prepared to jump through some additional hoops to get qualified for these housing loans.

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