You decide you want to look at condominiums because it’s cheaper. Good for you. Before you start, though, you should know that there are many issues that lenders have with financing on these properties. This doesn’t mean you won’t be able to get a loan, but knowing the red flags can help you be prepared.
Almost any loan program has requirements regarding condominiums. Government-backed loans, such as FHA and VA loans have slightly stricter guidelines than Fannie Mae, but they all have some type of guidelines. Basically, they have to protect their interest in the property because it’s not just you that they have to worry about. You only own the interior part of the unit. The lender also has to worry about the association and the other owners in the development. Everyone plays a role in the value of the property.
So what could cause a lender to have an issue? Here are the top red flags.
Pending Litigation Against the Development
Associations are prone to litigation from other owners and even third parties. This puts the financial strength of the development at risk. Almost no lender will allow financing on a property that the litigation has not been resolved. This puts lenders at a very high risk. Let’s say the development loses the lawsuit and goes into financial ruin. The value of the entire development could fall drastically, leaving lenders in the lurches as owners foreclose or just walk away from their properties.
Too Many Investment Properties
Another large risk occurs when too many renters live on the premises. It’s not the renters themselves that cause the issue, but the investors. If they have mortgages on the properties, they put the development at risk for a large number of foreclosures. Usually, investors will pay their own mortgage first before a rental property. If they hit a stumbling block financially, it could leave the development in the lurches. Generally, if more than half of the units in a development are investment properties, lenders can’t give you a loan.
An Unorganized Homeowner’s Association
Lenders look closely at the homeowner association’s documents. Namely, they want to know what the financial status is and what plans they have for the future. If the association doesn’t have a proper budget set up, it could put them at risk for financial ruin.
Generally, the lender will need to see the financial documents, current P&L statement, and the minutes from any recent association meetings. This will give the lender a good idea of the financial strength of the association to determine if they are a good risk.
Late Association Dues
Again, because the other owners in the development play a role in the condominium’s financial strength, lenders need to know how many owners are past due on their association dues. Usually if more than 15% of the units are past due on this bill, lenders will not fund a loan for the development. The association dues are how developments maintain the property and make major repairs. Having more than 15% of the owners late on this payment can cause financial strain on the association, putting everyone’s values at risk.
Finally, lenders need to see that an association is properly insured. You will likely have insurance to cover the interior components of your property. It’s the condo development’s responsibility to have insurance on the exterior components of the property and all common areas. Without this insurance, every owner is at risk for financial ruin. If someone gets hurt on the property and sues the association, it could cause the development to have budget issues and not be properly maintained.
Luckily, many of these issues are not incredibly common. If you look at HUD’s list of approved condominiums, you’ll see there are many already approved. If you happen to come across one that isn’t approved, consider it in your favor. No matter how much you liked the unit, if there is a risk for financial issues, it’s the last thing you want to invest in right now.