Mortgage challenges for condominiums.
Many consumers are unaware that for conforming mortgages through Fannie Mae and Freddie Mac, a condominium project review is required. Associations and management companies frequently charge the buyer and/or seller hundreds of dollars to answer lender questions, to see if the condominium project conforms to guidelines of Fannie Mae and Freddie Mac. Often a consumer does not learn that a project will be disqualified until after they have invested hundreds of dollars into inspections and appraisals. Here are a few things they are looking for. And if you already own and condominium or if you are part of a board, maintaining these requirements can protect your home values enabling a large percentage of potential buyers to obtaining financing.
- First of all, these types of condominium projects are essentially automatically disqualified, and determined to be “non-warrantable” because they can not qualify for a conforming mortgage.
- Timeshares or Segmented Ownership Projects: Projects that operate as timeshares or have segmented ownership structures.
- Houseboat and Floating Home Projects: Developments consisting of houseboats or floating homes.
- Condotel (Condo Hotel) Projects: Projects operated as hotels or resorts where units are individually owned but often rented out on a short-term basis.
- Projects with Excessive Commercial Space: Projects where a significant portion of the total space is used for commercial purposes, typically exceeding 25% of the project's total square footage.
Discovery through the process of reviewing meeting minutes or the condo questionnaire of the following details could also prevent conforming financing. Exact figures are subject to change but these are some things to look for.
- Non-Owner Occupancy: There may be exceptions, but buyers beware if less than 50% of the total units in a condo project are owner-occupied.
- Delinquent HOA Fees: No more than 15% of the total units in a condo project can be 60 days or more delinquent on their HOA dues
- Single Entity Ownership: A single entity (including a developer) is generally allowed to own up to 25% of the total units in a project for established projects. For new projects, there are specific guidelines that might allow for higher percentages temporarily.
- Inadequate Insurance Coverage: Must cover the full replacement cost (no cash value coverage allowed) of the project's insurable structures, sufficient liability coverage for common areas and public ways, fidelity insurance required for projects with 20 or more units protecting again fraud or theft by those handling the association’s funds, inflation guard protection that protect the condominium association and unit owners from the financial impact of being underinsured in the event of a major claim
- Inadequate Reserve Funds: it is generally required that condominium associations contribute at least 10% of their annual budget to a reserve fund
- Commercial Space Usage: Projects where a significant portion of the total space is used for commercial purposes, typically exceeding 25% of the project's total square footage. Just beware of commercial space in general.
- Litigation: litigation for construction defects, major structural defects and large settlement amounts will definitely be a problem, but litigation for insurance claims or small claims could also cause problems.
Incomplete Construction: Projects that are not fully completed or where the developer still controls the HOA can be denied until completion and control are adequately transferred. There is an exception on a phase by phase basis. - Deferred Maintenance: Since the Florida condominium build collapse, associations need to state that there is no significant deferred maintenance or critical repair needs are identified and no current or foreseeable mandatory evacuations in the project for maintenance.
Christopher Gibson
NMLS #1910430 | C2 Financial Corp NMLS #135622
Call me: 720-449-6622
Email me: C@ChrisRayGibson.com
