Every week, we ask a real estate professional for their Short List, a collection of tips and recommendations on an essential topic in real estate. This week, we talked with Kevin McGoff, a senior loan officer with Jeanne D’Arc Credit Union, for his condo financing tips.
Condominium financing is very different from financing a single-family home. Lenders will look into a number of things (depending on the downpayment and occupancy type) going on in the condo complex before they will grant a loan.
Sometimes you will see a condo that seems to be priced low, only to find out that the unit is not “warrantable” or “salable” to FNMA or Freddie Mac (thus the reduction in price). If you want a fixed-rate loan, then you’d prefer a unit be salable to FNMA or Freddie Mac, as that’s where you will find the best interest rates. If you are open to an adjustable rate, however, and are putting at least 20 percent down, then it’s not as important, as almost every local bank will finance you without a problem.
If you plan on being in the condo a long time, or at the very least you will keep it as rental property after you move out, then a fixed rate at today’s low rates is the way to go. The lender is looking at the following items in order to make sure the loan is “warrantable” to FNMA or Freddie Mac:
8. Owner occupancy rate (depending on the down payment, it can be very low, or must be 51 percent if you are putting less than 20 percent down).
7. Also, no single entity can own more than 10 percent of the entire project, but that’s if it is a large project; for smaller projects, typically no owner can own more than one unit.
6. Condo fees for unit owners cannot be more than 15 percent in some areas.
5. Commercial exposure of building limited to 20 percent.
4. No litigation allowed (unless minor, nothing against developer or structural).
3. Homeowner association must not be controlled by original developer.
2. Budget must allocate 10 percent a year towards “replacement reserves,” meaning that whatever the budget is for running the complex, 10 percent must be set aside. For example, a $5,000 budget must have $500 in “replacement reserves.”
1. Deed restrictions will need to be reviewed if there are any.
If any of these items are issues on a property you are reviewing, you may have to consider a local bank, as they will be less concerned. The downpayment will need to be 20 percent, usually.
Be prepared to answer those questions for your client in advance. They can impact the financing available, and potentially your resale availability down the road (to those potential buyers only putting a small amount down).
Kevin McGoff (NMLS #201212) has been in the mortgage industry for 25 years in the Boston market. Currently employed at Jeanne D’Arc Credit Union, Kevin made his name financing mostly condos. As the rules have changed, financing has become tougher. It is important to know the “roadblocks” to financing. Kevin can be reached at 781-771-9976.