Prospective condominium (condo) buyers with less than a 20% down payment, and their agents, must brace for the lender bias against condo units. This should come as no surprise since condo prices and sales volume during a business cycle are extremely volatile. Condos are the last to jump in price, and price inflation is far greater for condos than single family residences (SFRs). Worse, condos are the first to drop in price, and the price drop generally wipes out nearly all increases since the last recession, except for consumer inflation (CPI) and increases due to an extraordinarily unique location.

Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) have all increased their restrictions for loans in condo projects. For condo buyers to get a loan, a new project must have a set percentage of its units under contract. Obtaining the requisite purchase contracts, of course, becomes more difficult when the availability of financing is in doubt. Other restrictions, like requiring all homeowners’ association (HOA) owners to be up to date on HOA fees with two past years of reserve and payment history, make condo purchase-assist loans still more difficult to acquire. Developers will sometimes offer loans themselves to circumvent the government agencies, but most would-be buyers will remain at the mercy of the Fannie, Freddie, and the FHA.

first tuesday take: The ability of buyers to get financing for resale condos in California is also closely tied to their ability to qualify for private mortgage insurance (PMI). To qualify for PMI coverage when FHA insurance is not available, a unit within a residential condo common interest development (CID) must have a minimum 15% downpayment (up to 19%), and the HOA must meet the following standards:

  • cash reserves of amount equal to not less than three months of assessments
  • 10% of assessments have been reserved monthly for capital expenditures and maintenance over the past 12 months;
  • maximum of 30% rental of units within the CID;
  • maximum of 15% foreclosures within the CID; and
  • maximum of 10% ownership of units by any one person.

For information pertaining to the FHA’s May 10, 2009 regulations tightening the requirements of condo financing they will insure, first tuesday members are encouraged to see Chapter 40 of the textbook Real Estate Finance, available to all members on their Course Materials-on-CD-ROM.

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Re: “Condo buyers find it tough to get mortgages”, from The San Francisco Chronicle