Which Condos Earn The Gold Medal?

Have you been watching the Winter Olympics?

The results of some of the sports are clear cut -
the fastest time wins the medal like in bobsled,
alpine skiing, speed skating.

Other sports, however, are judged and the
results may be more subjective - ice skating,
ski jumping, and the wild snowboarding trick
events.

Condo approvals by lenders tend to be more
subjective with room for some interpretation
for conventional loans.

When lenders are asked to lend on a condo-
minium unit, part of their decision is based on
the creditworthiness of the borrower.

Beyond that, however, they are also concerned
about the health of the condominium project.

There are guidelines that are published by
FNMA and FHLMC that stipulate what they
require for a lender to sell loans to them. Most
lenders will adhere to those guidelines (or even
be more strict) so that they have the ability to
get the loan off of their books and have FNMA
and FHLMC take the interest rate risk in the
future.

A couple of the basic guidelines deal with the
occupancy of the units and how well the unit
owners are paying their homeowner's association
dues.

Guidelines typically call for at least 51% of the
units in the condominium project to be occupied
by owners as their primary or secondary homes.
If a borrower is seeking a loan with less than 20%
cash down payment, those loans require private
mortgage insurance. The mortgage insurance
companies may require owner occupancy closer
to 70% of the project.

There are some good reasons for these rules.
If a project is predominantly a rental complex,
the pride of ownership tends to be diminished.
Instead of the majority of occupants taking
responsibility for the care, maintenance and
appearance of the buildings, off-site landlords
tend to be less hands-on and the project
becomes less desirable.

Another guideline that is getting a lot of
scrutiny is the percentage of units where the
homeowner's association dues are delinquent.
Lenders are looking more favorably on projects
where there percentage of delinquent units is
less than 15%.

A homeowner that does not have the ability to
stay current on their HOA fees is an early
warning that they may be facing serious
delinquency on their mortgage. This may lead
to defaults and foreclosures which does not help
property values in the condo project.

Also, delinquent HOA fees means that the
homeowner's association has less money to run
the day-to-day operations of the project and
less money to out into the reserve fund for
big-ticket expenditures in the future (re-roofing,
re-paving, extensive pool repairs, etc.). This
may lead to special assessments to the unit
owners which puts a strain on their financial
capacity.

Lender are sometims vilified about being too
strict with their lending criteria. But as we
have seen over the past five years, when
lenders are very lenient they are enabling
homeowners to get into troublesome situations.

When the lenders exert more scrutiny, they
are also helping borrowers avoid condo projects
that may not be as healthy as everyone would
like. Borrowers implicitly are looking for "experts"
to help them make judicious decisions. The lender's
condo criteria can be considered as helpful in this
case.

If borrowers really thought things through, would
they want to be investing their money to live in a
predominantly rental project where a fair number
of their neighbors were struggling to meet their
financial commitment to the community of unit
owners?

I think many would seek ownership in a different
project, even if the lender did not impose their
requirements on the loan approval.

Knowing the guidelines before falling in love with
a condo can keep the disappointment to a minimum.