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How to buy a condo

If you want to buy a condominium unit, and you’re not paying cash, this article is for you.

If you finance your condominium with a Fannie Mae, Freddie Mac, VA or FHA home loan (between them they have 94 percent of the mortgage market), your condominium project must meet the guidelines of the corporation or government agency that backs your loan. Here is what you need to know to buy a condominium.

The biggest obstacle for condo buyers is the shortage of approved developments. According to industry estimates, only about 20 percent of formerly-FHA-approved projects are still approved for FHA financing. Before the mortgage crisis, if a condominium community was not approved for FHA financing, buyers could submit their unit for “spot” approval, meaning the entire development did not have to be approved. That’s not the case today.

Buying a condo with Fannie Mae or Freddie Mac

Condo quoteWhile Fannie Mae has streamlined the process by which condo developments can obtain approval, the reality is that very few projects are approved. To see if a condo you’ve got your eye on is eligible for Fannie Mae or Freddie Mac financing, you can find a list online. Don’t be surprised, however, if your state has just a handful (or even zero) of condos listed.

If you want to buy a unit that’s not on the approved list, you may be able to request a “limited review.” A limited review is conducted by the lender – it’s just a questionnaire that’s completed by the property manager or head of the homeowner’s association. To be eligible for a limited review, you must put down at least 10 percent for a primary residence or 25 percent down for a second home.

Limited review criteria are:

  • Commercial space can comprise no more than 25 percent of the square footage
  • At least 10 percent of association dues must be allocated to reserves
  • Fewer than 15 percent of units must be in arrears with their dues
  • More than half of the units must be owner-occupied
  • Insurance must meet GSE guidelines
  • There can be no lawsuits over safety, structural soundness, habitability or functional use
  • No single entity can own more than 10 percent of the units unless there are five to 20 units; in that case, a single entity can own two units
  • Minimum square footage per unit is 400 square feet
  • Condominium rentals are not advertised with daily rentals or other hotel type amenities.

Projects ineligible for a limited review are subject to a “full review.” The guidelines of a full review are stricter:

  • 51 percent of units are owner occupied or second homes
  • No single entity owns more than 10 percent
  • Maximum commercial space is 20 percent
  • No construction defect litigation. All other litigation will need to be reviewed.
  • Budget–line item for reserve with at least 10 percent of assessments/income being collected
  • No more than 15 percent of association dues delinquent more than 30 days
  • Condominium rentals are not advertised with daily rentals or other hotel type amenities (minimum three-day rental period)
  • Insurance coverage must be sufficient (hazard, flood, liability, fidelity and HO6 if required)
  • Review of condo docs to address:

a. Compliance with laws
b. Limitations on ability to sell or first right of refusal
c. Amendments to docs
d. Rights of mortgagees and guarantors
e. First mortgagees rights
f. Unpaid dues
g. Minimum square footage of unit is 400 square feet

Limited and full project reviews have a duration of 180 days.

Project Eligibility Review Service (PERS)

PERS is a review process in which lenders submit new, newly converted, and established condo project information to Fannie Mae to determine their eligibility. This is optional for many communities but required for these:
  • New and newly-converted condos with attached units located in Florida
  • Newly-converted rehabilitated attached units in condo or co-op projects with more than four residential units
  • Units in condo, co-op, and PUD (planned unit development) projects consisting of manufactured homes, except for PUD projects that contain multi-width manufactured homes.
PERS approval is expensive – fees start at $2,500 plus $30 per unit. It’s not surprising that there are so few approved communities. The process requires lenders to complete many burdensome steps. PERS approvals have a duration of 18 months.

FHA condominiums

FHA condominium approvals are more straightforward. You can look up a condo’s approval status on HUD.gov. Projects that meet FHA standards can be submitted for approval directly to the FHA, or they can be approved by “Direct Endorsement” FHA lenders which have been granted the authority to make that determination. If a condo project is submitted for FHA approval, the process generally takes about 30 days.

HUD charges no fee to associations or individuals seeking approval for their condominium projects.

To learn more about FHA loans, read “Advantages of FHA mortgages.”

VA condos

For condominium buyers seeking VA home loans, the VA maintains a searchable database of approved projects on its website. Lenders must submit a written request for VA-approval to the VA and a copy of the condominium’s organizational documents. The VA examines the condominium’s organizational documents for compliance with VA regulations, and notifies the requesting lender/sponsor within 30 to 90 days. To speed up the process, the VA recommends that lenders or homeowners supply an attorney’s opinion stating that the community meets VA guidelines.

Current VA mortgage rates

Adjust your timeframe when financing a condo

If you’re financing a condominium purchase, plan on a longer processing time. Lenders have to assemble a lot of paperwork and conduct interviews before submitting a package to the authorities who approve projects for mortgages. It can add 30 to 90 days to your escrow, and this should be considered when you’re deciding to lock in an interest rate. The good thing about the requirements for condo approval is that, by refusing to lend on riskier properties, mortgage lenders protect you at the same time they protect themselves.

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