Transcript
Hey guys, welcome back for another week of Mortgage Matters in Minutes. I'm your host Brent Rasmussen, owner of Mortgage Specialists. Today we're talking about condo lending and what you need to know specifically about condo lending. A lot of people are not aware whatsoever that lending for financing or a home loan, if you're purchasing a condo, is completely different than a single family dwelling home. And it's not that it's different about you, the consumer. It's also dealing with the condo project. And we're going to talk about that here a little bit today. Condo project and condo rules can be found online. But I can tell you each and every day, even this week, we've contacted a condo project here locally that is unaware of what they need to do to make the project what's called warrantable, which basically means allowed to be lent into a Fanny May, Freddy Mack, FHA, VA loan. So, let's talk about condo financing specifically and why there's issues. because people would assume a dwelling or a place to live is the same, but in our regards to the risk is not quite the same. So, condos, what are condos specifically? They're legally descripted or have a legal description that is set up as a condo regime. And you can't just tell by looking at a project whether it's a condo or it's not a condo. You have to look at the legal description to find out. A lot of places have what's called HOA dues or might look like a high-rise condominium. Doesn't necessarily mean they are. It comes back comes down to when the project was started and structured. How was it legally structured? And with the condo, what happens is you own the property from the studs inside your unit where you share hallways, you share maybe elevators, you share common space and you pay into HOA dues to generally take care of those space and pay in those spaces. So, if we're looking at Fanny May and Freddy Mack, for example, and conventional loans, they do have set guidelines, and we'll talk generally about what those guidelines are here. But if you're looking at FHA and VA, that particular condo project has to be approved by FHA and VA. And for a while there after 2008, there was a lot of problems with condos because once a unit or many units in a certain project might go up for sale, it does affect other's value. And we've seen that happening hugely down in Florida after condo projects structurally have not sustained time and have collapsed. There's many new state laws included in that as well too. So for a conventional loan we're specifically talking about here today, there's two types of condo reviews. We have the full review which requires more documentation, more questions asked of the HOA. It's a longer form. They're going to ask for more information with financials and what's going on with the project. And then there's what's called a limited review. I can share with you if you are obtaining a limited review, you have a much greater chance of financing. Limited reviews generally only come up if you're putting 20 to 25% down. If you're putting less than that down, they're going to do a full review. and we're going to talk about all the things that they're looking at, not necessarily about the borrower, but about the condo project itself. So, we have a lot of clients that say, "Well, I have perfect credit. I have a good down payment. I have very good income. What's the problem?" And the problem isn't you, the borrower. It's the actual property that we're looking at to see what risk problems we've seen come up in the past. And again, we don't set these rules. These are set by large national companies called Fanny May and Freddy Mack that we speak about nearly every week of what those situations come out to be. First thing we're going to look at on the condo questionnaire is budget. Do you have money set aside for reserves? And generally speaking, the guidelines are looking for 10% of reserves of your annual budget. So, do you have money set aside for emergency? If something was to go wrong, do you have money to pay off certain things? Next is HOA delinquencies. Are the units or the people in the units, are they all caught up with their HOA dues? The threshold generally there is around 15%. If there are more than people more units than 15% of that project have not been on time or delinquent with their dues considerably, there might be some issue going on. And generally the whole problem with condos is you have one, two, 10, hundred people trying to come together to agree on one decision. And that's very hard to do. We've seen it with business owners. You see it with marriages. You know, the statistics are very high on breakups that are happening because it's hard to get someone to agree to everything that you may want to do, let alone 5, 10, 20, 50 other people. And so because of that, not everyone is on the same page. These situations come up and when they come up, lenders understand there's a greater chance of there being a problem with the payment being made if that is the case. Also, they're going to look at the specific project to see how many units are owner occupied, meaning it's their primary residence versus maybe their second home or being rented out. makes a huge difference if a whole condominium is just rental properties. Generally, we see that among neighborhoods when a neighborhood has all rental properties, they're not taken care of as well as a whole neighborhood of primary residents. So, these statistics have been proven through many years. They're also going to see if you've been a part of any litigation, there's any structural damage, any county inspection or state inspection level. And lastly, one of the most important is having the correct amount of insurance. Whether that's ensuring the structure itself, ensuring the hallways, having enough fidelity bond, having enough in the master policy for coverage in case that happens. Because if you own your own property, you carry your own insurance. And now that you all in a condo project are sharing the property, you have to have a shared insurance policy for anything that was to happen to the project itself. So, red flags that are going to kill deals, too many investors, too many second home users, not enough money set aside for reserves, not enough insurance if there's any lawsuit going on. and these are the questions that are going to be asked in the questionnaire that we send to the association. Generally what we see here in the Nebraska area is a lot of individuals volunteer their time with the association and they're not a paid property manager, real estate attorney, whatever you want to call it, that understands maybe what all these questions mean and how it impacts lending in the environment. Many condo projects are purchased in cash. So, when they put the offer in, accepted the financing, accepted the terms, they used their own cash to buy the property. And if you're using cash, not a problem. But we're seeing individuals getting back into interested in condos because of prices being so high, many times condo projects because of the size and the shared expenses, the sales price is lower. But what we also entertain is having you look at the HOA dues to see how expensive or inexpensive those can be. Many times when we add that into your payment, that's going to give you a same higher payment on a different property. And we want to compare apples to apples. So tips for buyers, real estate agents, anyone interested in condos, be educated. That's what we're here to do. When we do pre-approvals and someone mentions they're interested in a condo, we find out right away what condo project they're interested in and we try to get the forms completed so at least we can get the demographics of what's going on to understand if lending is an option in that project or it might not be a option in that particular unit or the condo regime I guess as well. I've been teaching courses for over 20 years and I can share with you that when I teach courses to real estate agents, they're not aware necessarily that a condo has different requirements than a single family dwelling does. And that causes issues. But knowing that and you're listening this video, getting information, getting educated, ask the lender you're working with right away. What do we need to do to make sure that my pre-approval matches the condo project or a condo that I'm interested in? Also, if you can get as much information as you can from the condo association, whether that's their budget, whether that's the last few years of the monies that they've spent for income, expenses, insurance costs, things like that. But then also ask them about the condo questionnaire because all of these things that we as lenders look at are a very valid reason because if these things go over the threshold, statistics show there's a greater chance of that particular project not doing very well i.e. losing value, going into foreclosure, all the sorts that cause people financial difficulties and moving forward as well. Again, we're here to help a mortgage specialist, give you information, education. Hit that like and subscribe button below. Comment about any stories that you've heard of on condo lending or if you've been through it yourself. We love to assist you. Call us anytime at 4029915153 or check us out on our website at mtg-specialists.com. Have a great rest of your day.
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