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A buyer with perfect credit, substantial savings, steady income and long-term employment applies for a loan and is turned down even though the property appraises for higher than the purchase price.
Condominiums are the start home of choice for many home buyers today because they are generally less expensive than conventional single family houses. The term “condominium” does not describe a particular style of architecture, but rather a type of joint ownership. Each living unit is individually owned “from the paint in” while the facilities and common space are owned collectively by all the unit owners. Condominium unit owners pay a monthly maintenance fee which pays for the management of the complex, upkeep of the common property areas, and often the cost of some utilities. The cost of this monthly fee must be included as part of your monthly housing payment.
Selecting a condominium is more complex than buying a single family house because it also involves joining a social group and buying into a business. As a result, you and your mortgage lender will need to investigate not only the specific unit in which you are interested, but also the entire project from a physical and financial standpoint.
For the novice homebuyer, this task may seem daunting. Realizing this, most states have enacted laws requiring certain documents to be provided to buyers of condominiums. Unfortunately, these documents are often extremely complex and unrevealing. The good news for homebuyers is that your mortgage lender will analyze the condominium association’s financial condition for you because they do not want to make a loan on a troubled condominium.
Condominium projects (and Planned Unit Developments-PUDS-another type of common ownership) must be approved for all loans that are secured by properties located within a condominium or PUD project. Home buyers are advised to have their mortgage lender investigate the condominium project in which they plan to buy before making an offer to purchase. Most lenders have a questionnaire that the condominium association can complete to help the lender analyze the project.
Of primary importance in evaluating a condominium is the percentage of units that are owner occupied as opposed to rented out by investors. The current acceptable percentage is 60% owner occupied or higher. The second major consideration centers around whether the project is 90% built and complete. If a project meets these two thresholds, then it is very likely that the project can be approved with little difficulty.
There are several other concerns that lenders consider as well. These include checking for adequate insurance coverage, an acceptable operating budget, competent management, and adequate capital reserves for major repairs. Only after successful review of these additional elements can a condominium project be accepted for collateral as a loan.
Why does a lender take such pains to review condominiums? The answer lies in the fact that if the association fails financially then the project will not be maintained, people will move out and the value of the collateral will drop-often to nothing! The important issue to remember is that these reviews are for your protection just as much as for the lender’s.
Lenders will consider waiving the requirements and reviews on condominium projects on loans where the borrower is making a down payment of at least 25% of the purchase price. However, while this technique will get the buyer into the property, the buyer must consider the fact that he or she will have difficulty selling the property if a future buyer of the property can only put down 5% or 10%.
Recent mortgage guideline changes from Fannie Mae now permit condominiums on new condominium construction projects. In the past, borrowers would have to wait until a majority of the units were sold before they could get a conventional fixed rate mortgage loan.
Finally, don’t forget that sometimes single family homes can be part of condominium or PUD projects. In these cases, condominium rules will apply. It is important to check with your attorney, lender and realtor when reviewing all aspects of your home purchase.
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