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The adoption by the Federal Home Loan Corporation (FreddieMac), of the Federal National Mortgage Association’s (Fannie Mae’s) project standards pertaining to co-ops, condos and PUDs has raised some questions among consumers and Realtors®. What are these property types and how do they differ? What qualifying guidelines does a lender apply and what financing options are available? How are they classified by secondary market investors?
According to the 1993 American Housing Survey, conducted by the U.S. Census Bureau for HUD, of the 61.25 million owner-occupied primary residences nationally, 419 thousand are co-ops and 2.53 million are condos. (Figures are not available for PUDs.) Fannie Mae defines the three property types as follows:
Co-op (cooperative project): A residential or mixed-use building wherein a corporation or trust holds title to the property and sells shares of stock representing the value of an apartment unit to individuals. These individuals receive a lease or stock certificate as evidence of ownership. (The individuals do not own the apartments, instead, they own shares in the co-op).
Condo (condominium): A real estate project in which each unit owner has title to a unit in a building, and an undivided interest in the common areas of the project (e.g., the grounds, elevators, or hallways).
PUD (planned unit development): A real estate project in which each unit owner has title to a residential lot and building (the dwelling) and a non-exclusive easement (right to use) on the common areas (parks, recreational facilities, etc.) of the project.
For all of these property types, a monthly fee is usually paid by the owners to the homeowner’s association or corporation for maintenance of the building, grounds, recreational facilities and to cover any expenses incurred for the upkeep of the property.
Two of the most important qualifying factors in the mortgage approval process is a borrower’s ability to repay the loan and creditworthiness. However, if a borrower is purchasing a co-op, condo or PUD, there are other considerations which are pivotal role in the mortgage approval process. In addition to the borrower’s financial qualifications, the financial soundness of the project must also be determined. The lending institution will review such factors as project management, the project’s operating budget and homeowner’s association budget, insurance coverage, and the percentage of delinquency of monthly payments by owners.
Reviewing these factors is required by Fannie Mae project standards. Why Fannie Mae? Fannie Mae is an important player in the secondary market (a market for the purchase and sale of existing mortgages) for co-ops, condos and PUDs. Moreover, when it comes to co-ops, they are one of the few institutions willing to buy these loans.
Fannie Mae (and now FreddieMac), classifies co-ops, condos and PUDs according to specific types, based on certain criteria. Realtors should contact their local mortgage representative or Fannie Mae for more detailed information. Some of the criteria applied by Fannie Mae to classify projects are: whether the project is new or established; who has control over the homeowner’s association in the case of a condo or PUD; presale percentage requirements; and what percentage of units have been sold and of those, what percentage were principal residents or second home purchasers. Based on this criteria, the property is assigned a specific classification, which has its own set of qualifying guidelines.
Many lenders have fixed- and adjustable-rate conventional loan programs for co-ops, condos and PUDs. The loan programs available, in most cases, are the same as those available for one- to four-family homes. However, the interest rate (and in some cases, the points) charged for co-op loans is usually higher than the rate for condos and PUDs. In addition to conventional financing, government financing is also available for condos and PUDs. (State restrictions may apply; co-op financing not available.)
The FHA offers fixed- and adjustable-rate loans for condos and PUDs insured by HUD. With a lower down payment requirement and reduced closing costs, an FHA loan translates into increased opportunity for would-be buyers with limited cash resources. In addition, with the new spot approval process now permitted by the FHA, lenders can approve existing condo projects which did not have prior FHA approval (project must have 4 or more units), thus streamlining the approval process for borrowers.
The VA also offers a fixed-rate loan program for condos and PUDs to eligible veterans, reservists and those who served in the National Guard for six years. Loans are guaranteed by the VA and have low cost, easy-qualify features with flexible terms.
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