Condo financing | maryland, virginia, d.c.
It might have been better to have titled this article “Condos for Cash,” since it seems that all-cash might be the only guaranteed way to purchase a condo today. Simply put, if you are interested in buying a condominium in today’s market, be prepared to face some substantial financial hurdles.
The problem now lies with the speculative growth that took place during the
last real estate boom. Apartment buildings were converted at an incredible rate to take advantage of the demand and sold at exorbitant prices. When the market sagged, it affected developers who were building new units. Since a condo owner is also a joint owner of all the common areas, any sizeable drops in ownership due to people not going through with their
contracts, being foreclosed on or sales coming to a halt hurts the cash flow
(since condo dues are not being paid) needed to pay the association’s bills.
As this economic stress began to impact condo communities, its effects
have been disastrous for their financing. Almost all mortgage insurance companies are now refusing to insure any condo loans and Fannie Mae and Freddie Mac have tightened their rules considerably, making financing very hard to obtain.
So how can you buy a condo? First of all, all-cash transactions will always work and you can negotiate some incredible deals in today’s market due to the enormous supply and lack of buyers. However, this is generally a
path reserved for well-heeled investors.
If you finance the purchase, here are your current options:
FHA- This is the only option if you have limited funds since FHA only
requires a 3.5% downpayment. However, the condo project has to be FHA/
VA approved and this approval list can change rapidly. The key requirement for FHA/VA approval is the size of the investor concentration in the project. The higher the percentage of non-owner occupants (renters), the greater chance that the project is not approved or is in danger of losing its approval. The reason the number changes is that, in a slow market, if you can’t sell the property you may have to rent it in order to stay current on your mortgage.
Conventional Financing Financing- You will have to make at least a 20% downpayment and pay a premium (rates will be higher due to the perceived risk) in order to get the mortgage. Fannie Mae also has rules regarding investor concentration. But Fannie Mae also monitors the type of development you are buying in (mixed-use projects that have a non-residential component are not eligible), seller concessions and the percentage of units already sold and settled. A seller will have to provide an incredible amount of documentation to satisfy both Fannie Mae as well as the underwriter.
Financing Developer/Seller Financing- Where one party is eager to sell, many options are always available. Developers may well be able to offer below-market financing from the bank that provided the construction loans. Here, everyone has an interest in making things work.
If you are thinking about buying a condo, extra due diligence is required, so you will need to:
• Find a Realtor who is knowledgeable about condos and who you can trust.
• Closely analyze the financials that must be provided to you before the
contract can be ratified. Be especially careful if the development
lacks adequate reserves for future maintenance (parking lots will have to
be repaved), has a large number of delinquent condo dues payers or has
too many units on the market. Today’s approved project may be tomorrow’s casualty.
• Don’t give up hope. Many good developments are being affected
through no fault of their own. Bargains are there but purchasing one will
require some extra effort on your part.
• These purchases and loans will take longer to process and
complete.© 2007, Real Estate Information Services, Capitol Assets & Choice Finance®
Eric Strasser, 301-996-5001
Loan Officer for Maryland, Virginia, D.C.
choicefinance.net contributing writer