Condo Owners and Buyers…Beware of Lending Issues

Westcoe Realtors, Riverside California…For anyone who may already own a condo, or for anyone who is considering purchasing a condo, this next tasty bit of information comes to you from the ever-changing lending world of real estate.  The changes that occur regarding what lenders will and will not do for a potential borrower vary almost daily.  We do our best to keep everyone aware of what is happening, but it can be a pretty fast moving target.  However, for today, anyone who has any interest in a condo needs to understand the following.

First, there are basically 3 ways to finance the purchase of a condo…an FHA loan (many borrowers use this type of financing), a conventional loan (not as many as FHA, but still quite a few), and cash (the smallest segment of buyers for obvious reasons).  Today, we are going to bring you up to speed on  the two loan programs and how they are changing with regards to condo purchases.

For FHA loans, the only way a buyer can use this most popular type of financing is if the condo project has been approved by FHA.  There is a process that a complex must go through (check with your Homeowners Association (HOA) to see if your complex has received eligibility), and if you have been approved, then any new buyer of a unit can use FHA financing.  If you development has not been FHA approved, you can try to obtain a “spot” approval, but don’t hold your breath.  A “spot” approval is not exactly quick, and most buyers simply get tired of trying to wait out this government bureaucracy, and move on to another condo complex that is already approved.  None of this is new, but the following is:  while this hasn’t been confirmed yet, there is much buzz about FHA stripping all condo developments of their FHA approvals by October 1, 2009. 

If this happens, it would not be particularly good for existing condo owners, as this would eliminate so many people who can only afford to buy with an FHA loan.  Our suggestion here is that you check with your HOA to see if they have any additional information on this issue, and we will keep you posted if we get anything concrete at our end.  Sometimes rumors fly faster than jets in our business, so perhaps this one will go away before it becomes reality…but stranger things have happened in our real estate world, so perhaps a ground swell of upset condo owners will help this potential change die a quiet death.

Secondly, there is conventional financing…and everyone needs to understand the two basic rules conventional lenders have for lending on condo projects.  The first is that the entire complex must have at least 65% owner-occupants…which means no more than 35% of the units in your development can be rented.  Normally the HOA has information on this…and if they don’t then they should get it, because a buyer cannot get a conventional loan without this ratio certified by the existing HOA. 

The second rule is even more onerous in today’s times, as many convention lenders will not make the new loan if the delinquency rate on HOA dues in the complex is over 15%.  This one can be tough on many developments, so it behooves a condo owner to be on top of this ratio as well.  The theory here is that the new lender does not want to make a new loan to a project that may be in financial trouble because not enough people are paying their HOA dues.  That can be a very negative and quickly escalating spiral downward for a complex, so conventional lenders set their limit at 15%.  Again, your HOA can give you these numbers, and if your complex is close, it may be better for everyone who owns a condo to pitch in and make the back HOA dues until they can be collected from the delinquent owners.  Just a thought.

In the end, lender rules and regulations change quicker than a teenager’s music preference, so everything referenced above could be gone by tomorrow.  However, until then, our job is to keep you up to date on what is happening…and this is what is happening for the moment.  We’ll let you know if any of this changes.

 Take care, and as always, let us know is there is any real estate issue you would like to see addressed here.