Fannie Mae changed their financing regulations around condominiums to compensate for the large amounts of development foreclosures. The net effect of this change makes it very hard for condo buyers to obtain financing for buildings that are less than half sold.
Conforming Condo Mortgage Guidelines
Until very recently, future homeowners could obtain a conforming mortgage fairly easily for the purchase of a condominium. After a rash of foreclosures in Florida, California and Nevada, Fannie Mae changed their underwriting guidelines to require a number of different rules around financing condo purchases. The most important new guideline required that the building must be at least 51% sold, with at most 10% owned by one entity.
This made buying condos in new buildings very problematic for future homeowners. Additionally, it caused significant problems for developers looking to move their newly built condominium. While some condo buyers can put 50% or more down to purchase their home, many cannot.
Qualifying for a Condo Mortgage
Condo buyers interested in buying in a new development should be proactive when it comes to financing. Many regional banks will consider financing these purchases at increase interest rates and will still require a significant down payment. Buyers should not listen to developers or real estate agents that tell them they can simply refinance their mortgage once the building reaches 51% sales. What these developers and agents are not telling buyers is that it could take two or three years to get to that point or much longer.
The best option to achieve financing for this purchase is the developer or the bank financing the developer. These banks typically have special programs for their developments that are outside their basic underwriting group. They can typically offer competitive rates and will only require down payments of 20%-25%.
Condo Mortgage Watch Outs
Before considering any new development, ensure that the developer is reputable. Do not consider developer financing that is contingent on a sellout or if the developer does not seems financially stable. While refinancing could be an option to reduce the interest rate or equity invested in the future, this should not the basis of buying a condo. If a buyer cannot handle the current payments based on the financing they originally obtain, they should not buy the home.
Regardless of the financing, future condo buyers should do a large amount of due diligence on their building and the builder. Ensure that the condo board is structured properly and that it has enough money to function for at least a year. Furthermore, despite the number of units owned by the developer, other owners should have a great voice. A strong board and a well financed condo association will ensure the building continues to run properly.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
