Important Considerations for Financing a Condo

In today’s lending world, condominiums are extremely attractive to potential buyers for the low-maintenance and amenity-rich options they provide. However, condos are a more precarious investment for lenders. Condo guidelines are much more extensive and require documentation not only on the residence, but also on the condo project (neighborhood/association). It’s a two part process and both parts have to be lender approved.

Appraisal and Review

An appraisal is generally required for all properties being purchased or refinanced (the exceptions being HARP loans, some FHA Streamlines, and VA IRRRLs).  Upon receipt of the appraisal, a lender will look at, among other things, the value of the property, the comparable sales and listings in the area, as well as the adjustments given for the various line items to determine if property itself is in line with lending guidelines and is a good credit risk. Barring no issues with the appraisal, the condo project will be reviewed.

Condo project approval is based on either a limited review or a more extensive full review of the project. Which type of review is determined by occupancy and loan-to-value ratio. Primary residences up to 90% loan-to-value ratio and secondary residences up to 75% loan-to-value ratio are subject to a limited review. Additionally, all investment properties require a full review.

So what exactly are limited and full condo reviews?

These are a lenders way of verifying that the project meets the necessary requirements for condominium lending. Both limited and full reviews require the Homeowners Association (HOA) to fill out what is called a Condominium Questionnaire and provide the master insurance policy for the project showing $1,000,000.00 in liability insurance as well as full replacement cost of the project improvements. A full review is more extensive and also requires a copy of the current budget, balance sheet, and recorded declarations and bylaws of the HOA, as well as proof of fidelity insurance.

What is asked on a Condominium Questionnaire?

The questions include, but are not limited to:

• The number of units and phases
• The number occupied and the type of occupancy
• The number owned by a single entity
• How many are for sale currently
• If the HOA is in current litigation
• Amount held in reserves by the HOA
• The number of owners past due in paying their HOA dues
• The aggregate amount past due

Whew! Basically, condo questionnaires give pertinent information about the statistics of a project as well as its health.

It is important to note that each HOA is different in their handling of Condominium Questionnaire and documentation requests. Do not be surprised if the HOA charges several hundred dollars for the questionnaire or if they take 7 business days to complete it. It’s very important for homeowners to have open lines of communication with  their HOA, not only to help facilitate document delivery but also to ensure they are aware of the HOA guidelines on purchasing or refinancing, including any additional fees they may charge.

What about insurance?

Borrowers are required to carry what is called HO-6 coverage, otherwise known as “walls-in” coverage. This is just what it sounds like, coverage from the walls in. HO-6 policies are fairly inexpensive and should cover roughly 20% of the property value. The actual structure is covered by the master policy provided by the HOA through monthly/annual dues.

Condo lending is so extensive that I could write about the guidelines all day! It can be a frustrating process if you are unprepared so be sure to talk with a licensed Loan Advisor about your specific situation.  Knowledge is power!

Written by: Courtney Nugent, Underwriter at Royal United Mortgage LLC

Published: 2/26/2016