Guide to Condo Financing in 2019

In Investment, Legal, Lifestyle, Market Trends, Purchasing Condos by Joey AbdullahLeave a Comment

By Joey Abdullah, MBA, CMPS, CDLP – Loan Consultant | Condo Expert | Life Transition Lending Specialist at CrossCountry Mortgage, Inc.

2019 is gearing up to be a great year to purchase a new home!

Condos are quickly becoming an extremely attractive way for first-time homebuyers and “right-sizing” purchasers to own a home without the hassle and multitude of typical maintenance responsibilities of a single-family home.

For those aiming to purchase a condo in 2019, I’ve compiled a list of 5 important things to look out for and questions to ask to help with your purchase.

1. Work with a Professional!

Make sure to work with a professional and local Real Estate Agent and Lender (if obtaining financing for a condo) — preferably an agent and lender who specializes in the specific locale where you are purchasing your condo.

Condominiums can be tricky to purchase, especially in busy metro areas where competition for housing, and pricing can be extremely tricky, even from one building to another.

Condos are also typically run by the owners in the condo project, and the way that these projects are run are extremely similar to a small business. There are intricacies with how the condo “business” runs, and you must ensure that it will work for your current living and financial needs (i.e. how budgeting and assessments work, pet policies, etc.). A professional agent and lender will be able to walk you through all of these intricacies with ease.

2. Asking If Condo Living is for You?

Condos are a great option if you’d like to live in an urban area; prefer the downtown lifestyle; want to invest in real estate with little hassle; and/or if you want to buy a vacation home with minimal maintenance requirements.

Perks of a condo include:

  1. Ease: Association fees can cover most exterior maintenance
  2. Proximity: Condos can be within short walking distance to shopping, work, etc.
  3. Amenities: Condos can have amazing amenities such as swimming pools, health and wellness facilities, common entertaining spaces (i.e. game rooms, movie theater rooms, etc.)
  4. Price: Condos may be less expensive than a single-family home in the area
3. Make Sure to Fully Understand the Homeowner’s Association (HOA)

As mentioned in the first section on working with a professional, the Homeowner’s Association (HOA) is the “business” that helps run the condo project. Some items to ensure that you have a firm grasp of are:

  1. Insurance coverage and type (the master policy for the entire project and what it specifically covers—so you know there is adequate coverage in case of a loss, and that the coverages are sufficient).
  2. Upcoming and past assessments. Assessments (or costs/charges) are in addition to the normal monthly HOA dues that are owed as part of being an owner. Understanding any upcoming assessments will be crucial to ensure that you are financially prepared for ownership. Also, understanding the frequency and costs of previous assessments will help you gauge how the HOA manages its finances and how well prepared it is for future work and/or improvements that come up.
  3. Reserves and Budget. Understanding the HOA’s financial reserves (how much money is set aside for future improvements/maintenance and unforeseen issues) is another key component. The same goes with the budget (or financial projections). As with any business, the best HOAs will have a strong financial position (i.e. well more than enough money in reserves/on hand, and have a solid and realistic future budget.
  4. Delinquency rates for HOA dues from other owners. This is a big one that can affect financing for future homeowner’s in the condo project, and a key indicator of the ability for the HOA to withstand any financial outlays. If the HOA has too many homeowners who have not paid their dues, this drastically reduces the “income” the HOA receives and can hurt the other homeowners as the HOA may not be able to afford the required exterior maintenance, insurance premiums, landscaping, trash/sewer dues, and other necessary expenditures.
  5. Pending litigation against the HOA. This can be a tough one to uncover during the home buying process, but is extremely important to try to find out any information on. You might not want to purchase a condo if a few of your future fellow homeowners are suing the HOA for something (trivial or not). This can affect future assessments (i.e. increase HOA dues or paying a large assessment to pay out the suit).
4. Financing a Condo the Right Way

Financing a condo works essentially the same way as financing a single-family home with a few additional requirements. A few of the additional requirements can derail or delay your purchase, which is why it’s crucial to work with a lender who specializes in condo financing.

The same credit and income analysis, along with ensuring that you have enough funds (and from “useable” sources) to purchase the home and pay back the loan will occur—the HOA dues are also added to the debt of purchasing the new condo, so ensuring that the HOA dues and the mortgage payment work within your budget is very important.

One big caveat to financing a condo, though, is that the lender only has “eyes” on your specific unit (with the appraisal required) and your specific financial scenario (not the rest of the homeowners). This adds additional risk to the lender, and so a bit more scrutiny is added to the process (all good things I always say, as even if you were going to pay cash for the condo, you’d still want to know most of the things that the lender will aim to uncover on your behalf).

A through condo review will take place from the lender prior to being able to fully commit to lending on the condo project. That is, in addition to your personal financial situation, the lender will dig deep into the financial condition of the HOA. As with most of the previous section’s items to watch out for, a good lender will thoroughly examine all of those items, and more, for you. You’ll be assured that the analysis will help “protect” you and your investment by uncovering as much info as possible to ensure that you are confident in the new condo and the financial stability of the HOA.

Again, working with a lender who specializes in condo financing will be able to also assist you with making sure that any issues that are uncovered (and making sure that as many of those “issues” are uncovered in the first place) are able to be either “fixed” or paid for prior to you closing on the condo and ensuring that you are not financial obligated for something that you shouldn’t be, or worse, not fully prepared for.

5. Understand the Difference between Warrantable vs. Non-Warrantable Condos

Whether you are going to finance a condo, or purchase the condo with cash, it’s important to understand the past, current, and potential future warrantability of the condo project. What does Warrantable vs Non-Warrantable mean? Well, to be concise, it simply describes the ability for Fannie Mae and/or Freddie Mac to be able to “back” a loan on the condo project.

If a condo is Warrantable, then “traditional” financing options are more readily available (i.e. with Fannie Mae and Freddie Mac). Since Fannie Mae and Freddie Mac are structurally behind most home loans in the United States, then this opens up the buyer pool drastically for the condo, which can help maintain and increase the value of the condo over time.

If a condo is Non-Warrantable, then traditional financing outlets are not typically going to be an option for potential buyers of units in the condo project. Since the buyer pool is diminished, this CAN HURT the stability and future value of the condo.

Non-Warrantability of a condo project can come from a myriad of factors (most are items that would cause concern for even all-cash buyers). Some items include: pending litigation against the HOA; under-insured HOA; too many HOA dues delinquencies from other homeowners in the condo project.

One big item that can derail the warrantability of a condo project is when too many units in the condo project are owned by a single entity. This causes concern because of the risk of this single owner possibly defaulting on their own loans or HOA dues, and causing multiple units to be vacant or dilapidated easier than others amongst other issues that can arise with a single entity owning too many units—this is similar to a single stockholder owning a disproportionally higher amount of stock in a company and being able to “steer” that company in a wrong direction easier than others.

The GOOD NEWS is that most lenders who specialize in condos have access to loan programs that can still lend on condos that are non-warrantable. The review process may take additional time, but financing can still be provided!

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When purchasing a condo, the real key is to do as much homework as possible on the condo project and to ensure that you are working with a professional agent and lender to ensure that you are protected and informed as much as possible. This will ensure a much smoother purchasing process, and get you into an amazing new condo that you can enjoy with ease!

Hopefully, this guide will help prepare you for your new condo purchase in 2019!

 

Joey Abdullah, MBA, CMPS, CDLP
Loan Consultant | Condo Expert | Life Transition Lending Specialist at CrossCountry Mortgage, Inc.

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