Getting financing when purchasing a condo can be a bit trickier than financing for a single family home. Your lender is going to look at the overall financial health of the condo association before deciding if they are willing to take the risk to loan on a unit in the building. Several of the factors that go into deciding the eligibility of a condo building are:
What is the owner occupancy rate? If a condo building has more than 49% of the total units currently being used as rental properties, most big banks will not lend on that property. The bank considers an non-owner occupied condo to be at a higher risk of default, and because of that low owner occupancy rates can tank your chances of getting a loan.
Does the Home Owners Association (HOA), have adequate money in savings to cover operating expenses and upcoming projects and repairs? Condo buildings are required to have a long term plan in place for needed maintenance and improvements. If a condo were to have all the money needed to complete any and all planned repairs, maintenance and upgrades, they would be “100% fully funded”. Buildings that are less than 30-40% “fully funded” are also considered a high risk by the lenders. When a building has a small amount of money in reserves, it is also more susceptible to a special assessment.
How many of the home owners are behind in paying their HOA dues? With the recent economic down turn, an increasing number of condo owners are behind on HOA payments. If more than 15% of the owners in the building are over 30 days behind on dues, the major lenders will not issue a loan for the building.
Is the building in the middle of any litigation? Litigation often stems from major issues in the building, often blamed on the builder or the contractors that completed the work. Recent examples of litigation include Site 17, 2200 Westlake and Newell Square. Major repairs such as siding replacement, window defects or plumbing defects are often the main reason for litigation. If the HOA is unable to get the accused party to pay for the repairs, the cost is almost always passed on to the homeowners in the form of a special assessment. Lenders will not lend on a building until the litigation has been resolved.
Does one person own several units? If one person owns over 15% of the units in a building, lenders consider that a red flag. When once person has “too much” ownership in a building, it can also make lending challenging. Many other odd little factors go into deciding if a condo building is qualified for traditional financing. Is the insurance up to date and does it provide enough coverage? What percentage of the building is commercial space? Is the building in a flood zone? All of these items can cause a lender to deny financing.
There is hope for buildings that do not meet the traditional lending standards. Private lenders (lenders that hold on to the mortgage note instead of selling it to the government) will often finance in buildings that traditional lenders will not. Banks such as Home Street and Washington Federal are great resources if you need financing on a challenging building.