Apr 9, 2018

I once worked for a broker who called condos the "bastards of the lending industry."  He wasn't far from the truth.

Condos lost more value than any other property during the last recession.  So lenders are very picky when it comes to financing condos.  Just like lenders have a list of requirements for borrowers (credit score, down payment, debt to income ratio), lenders also have a long list of requirements for condominiums.

If you have a listing that is a condo, have it pre-approved by your favorite lender.  Let me repeat that.  If you have a condo listing, have it pre-approved by your lender.  This is the most important advice I can possibly give you regarding condos.  Every lender has a condo team, a group of folks who will help get your condo approved.  Your favorite loan officer should be able to submit an HOA Questionnaire to this team and have your listing pre-approved.  There is nothing worse than getting a week away from closing only to find that your condo can't be financed!

Example of an HOA Questionnaire

Condos are (usually) approved by submitting an HOA Questionnaire and insurance paperwork to a lender's condo team.  There are no "one-off" approvals.  Individuals units aren't reviewed.  The entire project is reviewed.  It's all or nothing.

If your condo project is new (fewer than 90% of the total units have been sold), was a recent conversion, or your buyer has a small down payment, you might need more than a questionnaire and a call to the insurance agent.  You might need to provide budgets, financial statements, or reserve studies.

So how do you know if your condo might have issues?  The following are characteristics that might indicate a condo is NOT eligible for financing:

  • Projects in which an individual, investor, partnership, or corporation owns more than the following total number of units in a project:

    projects with two to four units = 1 unit
    projects with five to 20 units = 2 units
    projects with 21 or more units = 10%

    Vacant units that are still owned by the developer and being actively marketed for sale are not included in this calculation.

  • The total square footage used for commercial or non-residential purposes exceeds 25%.  Examples of non-residential space includes public parking, rental apartments, grocery stores (I'm looking at you, Aldrich's Condos), restaurants, or private membership-based fitness facilities.  Non-residential space does NOT include parking that is allocated to unit owners, common space owned by the HOA, or space designated for the exclusive use of the unit owners (storage lockers, fitness center, pool, or laundry room).
  • Projects in which the HOA or developer is named as a party in pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project.  If the litigation is minor, the project may be eligible.  "Minor" litigation may include:  non-monetary litigation like neighbor disputes, litigation for which the insurance carrier has agreed to provide the defense, litigation that would have an insignificant impact on the financial stability of the project, or litigation that concerns damage localized to one unit and that doesn't impact the entire project.
  • Any project that permits a priority lien for unpaid HOA dues in excess of six months (generally speaking).
  • Projects where the HOA owns or operates a non-incidental business like a restaurant or health club.
  • Any project that is operated as a group home or continuing care facility.  Age-restricted properties are fine as long as the residents aren't required to enter into a contract for healthcare.
  • Timeshares.
  • Projects with mandatory membership fees for the use of recreational amenities (country club, golf course) owned by an outside party (including the developer or builder).  Membership fees that are paid to use recreational amenities owned by the HOA are fine (i.e., Port Ludlow condos are fine since the Bay Club is owned by the HOA).
  • Projects that are managed or operated as a hotel.  This includes projects that include registration services and offers rentals of units on a daily basis, projects that restrict the owner's ability to occupy the unit, and projects with mandatory rental pooling agreements that require unit owners to either rent their units or give management control over the occupancy of units.  Additional characteristics that may indicate a project is operating as a hotel include:  room service, units without full-sized kitchen appliances, daily cleaning services, advertising of rental rates, location of the project in a resort area, few owner-occupants, units that are less than 400 square feet, and interior doors that adjoin other units.  If your project has any of these characteristics, expect to have to provide additional paperwork and explanations to your lender!
  • New projects where the seller is offering certain inducements to sale such as builder/developer contributions to closing costs, sales concessions, payment of a borrower's mortgage for a certain period of time, and/or contributions not disclosed on the closing paperwork.
  • Projects subject to split ownership agreements which curtail an individual borrower's ability to utilize the property.  This includes "common interest" apartments where the project is owned by several individuals as tenants-in-common and the borrower has the right of exclusive occupancy of a specific apartment in the project.
  • Projects with property that is not real estate (like houseboats, boat slips, and timeshares).  Boat slips and other amenities are permitted as long as they're owned by the HOA.
  • "Live-work" projects are only permitted if they meet the following requirements:  The overall character of the project must be residential.  Units must be limited to residential units occupied as primary residences where the unit owner is also the owner of the small business.  The project documents must permit commercial use and state what types of commercial use are acceptable.
  • Projects in which one owner is permitted to hold title to multiple units under a single deed and financed by a single mortgage.
  • Legal, non-conforming projects that could not be rebuilt to current density in the event the property was partially or fully destroyed.
Detached Condos

A detached condo is a unit that is zoned as a condo but the individual units don't share any walls.  Detached condos are treated just like a single family residence and are not subject to the whole condo approval process.  Umatilla Hill, Spring Valley Cottages on San Juan, and the Treehouse neighborhood in Port Townsend are all detached condos.

What if your condo project violates one (or more) of the guidelines above?  Then you have what is called a non-warrantable condoIt may still be financeable.  But not through traditional means (so no Fannie Mae, Freddie Mac, or government loans).  You'll need a portfolio loan.  And you'll need a strong buyer.  You probably won't be able to finance a non-warrantable condo for a buyer who only has 3% down and a 620 credit score.