Mortgage lenders have tightened the screw: It’s tougher to get approved for a loan in 2010 than it was in 2009 – and it’s a lot tougher than it was four or five years ago.
These days, mortgage lenders will want to verify all of the information on your application, including your income, assets, job status, credit history and credit score, and where you got your cash for a down payment.
At the moment, Fannie Mae, Freddie Mac and FHA account for around 90 percent of all loans being approved. So if you’re looking for a home loan, you’ll need to live by their rules.
It’s bad enough if you’re buying a single family home. For condo buyers, the application and approval process is getting even tougher.
New condo financing rules went into effect the last several months that may make financing for your condo an impossible proposition.
First, when it comes to FHA loans, most condo buildings must be “approved” properties, or buyers will not be able to finance their purchase through FHA.
In some cases condo buildings have been FHA approved for some time, but if the condominium project is not approved, the association might want to approach FHA to get the condominium project approved. If the condominium project is approved, buyers for units in that project will have an easier time getting financing.
FHA loans are now a greater percentage of the mortgage market and condominium associations must recognize that a large percentage of buyers of condos priced under $450,000 may use FHA financing. If the condo building isn’t approved, those buyers will have to find other loans.
The condo building approval process can take up to six months, as FHA combs through the property, its budget, financials and other information.
What is FHA looking for? A wide variety of factors can sink a condo building’s application for approval, including the number of people who are late on paying their assessments, the amount of cash reserves the property maintains, and the ratio of leased to owner-occupied units. Above all, FHA will reject a condominium building if the property needs lots of repairs and work.
According to some lenders, Fannie Mae guidelines will reject a condo building if more than 15 percent of owners are delinquent in paying their monthly assessments. Likewise, if the condominiums’ budget does not set aside 10 percent towards the reserves and improvements, under many circumstances the condominium will not be approved, particularly if the condominium is located in an area where real estate values have declined or are declining.
The budget and cash reserves issue alone will sink plenty of condo buildings, say real estate observers. If a property has a budget of $500,000 and the property is located in an area that requires a full review of the condominium or the borrower is putting less than 20 percent down for the purchase of the home, Fannie Mae and Freddie Mac want to see a line item for “cash reserves” of at least $50,000 – 10 percent of the budget going towards reserves of the association. Many buildings will contribute a token amount to cash reserves, preferring to institute a special assessment if the need arises but this system will cause buyers in those building to be rejected.
There are other obstacles lurking in the wings. Developers who built multi-use properties, with commercial, retail, or restaurants on the first floor and condo units above may find that their properties will not be approved for financing.
Fannie Mae guidelines require that no more than 20 percent of a building’s floor area ratio (FAR) can be commercial. So if the building has 3,000 square feet, with a 1,000 square foot shop on the first floor and two 1,000 square foot condos above it, the property will likely not be “approved” and a buyer would not be able to get financing.
Condo buildings applying for FHA approved status (which is separate from Fannie Mae and Freddie Mac) may find a six-month wait, while analysts do an engineering study, check out the budget, perform verifications and make sure everything else with the property falls in line with the new rules and regulations.
In addition, Fannie Mae ranks counties by how badly the county’s home prices are declining. If the county ranks poorly, lenders must do a “full review” of each condo building, which will slow down the financing process and perhaps even eliminate some buildings, meaning buyers will be out of luck.
Condo buildings located in markets where property values are stable will have to undergo a less intensive review of the condominium building’s finances and documentation.
All this is bad news for condo buyers. Buyers who didn’t close before the end of 2009 may now find themselves rejected for financing if they are buying in a condo building that has not been approved or can’t be approved. Can you imagine the headaches this will cause?
Lenders say that buyers who need a loan to close on their purchase should ask whether a building is approved for financing before bothering to go for a showing.
In other cases, buyers might want to get condominium documents ahead of time to determine if the status of the condominium will be a problem for the lender. Getting that information well in advance might eliminate or limit some of the headaches buyers and seller are facing as they try to buy and sell condominiums.
While there are some waivers being granted, condo buyers all over the country will find it more difficult to finance their purchases. These days, if you can’t finance a property, the number of prospective buyers will decline, and the property value could tumble.
Condo owners and buyers beware.