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Condo Mortgage Rules

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Condo Mortgage Rules To Remember

Mortgage loans that have condo projects as the collateral otherwise known as the subject property can be a little scary for underwriters. This is because condo mortgage rules differ from any other type of subject property regarding agency condo mortgage guidelines. Part of the reason that the guideline requirements for condos differs from other property types is that condos tend to be a riskier investment on the side of the lender. The reason that condos tend to be riskier for lending agencies is that if the Home Owners Association (also known as an HOA) board is not managing the upkeep of the property or the financial health of the project this can result in numerous issues that can cause salability issues.  Also these sorts of physical and financial misplanning can cause the unit owners to have to pay more in HOA dues and special assessments. 

But there are a few condo mortgage requirements that underwriters, HOA Board member and loan officers should remember. First off the main condo mortgage rule to remember is to always read the HOA questionnaire also known as a condo cert or an HOA cert. A lot of info is provided on the HOA cert. The first thing to look for on this is to see if the project falls under agency definitions of an established project or new construction. New construction projects are defined as project that have not sold off 90% or more of the project, subject to additional building and the HOA has not yet taken control from the developer. Established condo projects are defined as project with 90% or more sold and conveyed to purchasers, with no additional construction or phasing scheduled or allowed. Keep in mind a project may not have any additional phasing planned but if the condo declaration/ master deed or the title note that the project is able to be expanded past its current size that makes the project in a perpetual state of eternal new construction. 

The project status of being established or new construction is not necessarily a bad thing all that means is that more documentation is going to be needed. Also new constructions projects need full review automatically and full condominium legal docs such as the master deed/ Condo Declarations. 

Although the HOA cert can also reveal if the project has any resale/ deed restrictions even during a limited condo review. Also checking the title for resale restrictions is also a smart move as well. What a deed/ resale restriction is where the condo project or some of the units in the project that one cannot sell openly. One example of a resale restriction is a Right of First Refusal. Condo projects with a Right of First Refusal cannot sell or rent units without the board approving the buyer or renter. Now from a homeower’s viewpoint this sounds wonderful to make sure that there are not any criminals in the building. However, Right of First Refusals are are form of discrimination. Also in the event of a foreclosure when the bank takes the property back they have a hard time selling off the unit or renting it out while they are selling. Agencies do not want a harder job of reselling a unit especially if another financial crisis happens. 

Another hot topic that the HOA cert will touch on is the topic of environmental factors. Environmental factors is nomenclature for issues like condo projects with issues like asbestos, earthquake/ seismic activity, and pollution.  There are very specific requirements for these to verify that they are being abated and/ or monitored depending on type of environmental factor but; it is a question asked on the condo’s HOA cert. Also depending on the type of environmental hazard the appraisal might also comment on it. 

Another thing to watch out for on a condo HOA cert is regarding commercial space. Agency condo loan requirements limit acceptable commercial space max at 20% of the whole project. This is calculated by taking the total commercial square footage of the project and creating a ratio to the total square footage of the entire residential portion of the project. This is also thing that is detailed in the GSE standardize HOA cert. 

The next item to watch for on a Condo questionnaire for mortgage or HOA cert is the topic of single entity ownership. This is where one person, organization, or company owns a significant portion of the project. In the past underwriting guidelines stated overall no one can own 10% or more of a project. Period. End of story. Although in 2015 the guidelines were changed. Now it depends on the size of the project such as in a 2-4 unit project no one can own more than one unit. In a project with 5- 20 units a single entity can own up to two units. Although in a project with 21 or more units the 10% rule applies. This is a topic that is on both a full review and the limited review HOA cert. 

Lastly delinquencies. A way to measure the health of the project is to calculate how many people are behind 60+ days on paying their HOA dues. Underwriting guidelines require that no more than 15% of the project can be delinquent on HOA dues. This was changed from the rule of 15% being 30+ days delinquent. As 60+ delinquency measures how many units are about to be foreclosed on by the HOA.

Condos are a little less scary when you know what to look for on the HOA cert. Again the HOA questionnaire can detail if a project is new construction or established. It can also alert the underwriter to the project potentially having deed/ resale restrictions on the title. Or the project having environmental factors that need to be considered when considering the project as collateral. Also single entity ownership, and delinquencies are detailed on the HOA cert. It is all about knowing what items to watch out for.