The IML Real Estate Blog

What You Need To Know About Condo Financing In Orange County

September 24th, 2010 6:43 PM by Dave Gubler

You Need To Know About Condo Financing In Orange County

If you plan on utilizing FHA financing to buy a condo the first order of operations is to determine if the development(s) you are looking in are still FHA certified.  Many condominium developments have lost their FHA certification and most stand little chance of reinstating any time soon.  Even if you are not using FHA financing most conventional lending programs require that the condominium complex remains in a "healthy" state.

Via Rochelle Engelby (Engelby Real Estate):

If you are shopping for a condominium and you need a loan for your purchase, it is important that you and your agent understand the rules for financing. Prior to selling real estate, my background is in mortgages. I spent several years in the lending business with a focus on underwriting and compliance. My experience in mortgage lending has been extremely valuable to my clients when representing buyers and sellers. Every agent needs to have a good mortgage broker or loan officer that can frequently update them on the changes to lending guidelines and let them know how the changes will effect their clients. 

The lending guidelines do not just pertain to the borrower, but the property as well. A buyer can have an 800 FICO score, a 25% downpayment, plenty of reserves, low debt to income ratio, and steady employment, but still not qualify to buy in a condominium complex if it does not meet the lending guidelines. Why? Well, lenders have to consider the risk associated with not only the person that they are lending the money to, but also the property that they are lending against. A buyer should also carefully consider the same things that the lender does when purchasing in a condominium complex.

What are some of the things you need to know (and the lender will want to know) about a condominium complex before you consider purchasing it?

What is the owner occupancy ratio?

The owner occupancy ratio is the number of units that are occupied by owners vs. renters. Most lenders do not like to loan in a complex where less than 51% of the units are occupied by owners. It is considered a bigger risk because landlords are not as likely to maintain a rental property to the same standards as they would their primary residence.

How many units are delinquent on their HOA dues?

If more than 15% of the units are delinquent on thier dues it is difficult (if not impossible) to get financing. Do you want to buy into a complex where that many units are delinquent? If people aren't paying their dues, the whole complex suffers with deferred maintenance and the reserve fund decreases. A high number of owners not paying their dues is a sign that there is probably going to be (if not already) a lot of distressed properties in the complex which can contribute to property values falling.

Is there pending litigation?

If there is pending litigation it can be very hard to get financing. Often, pending litigation is due to some type of construction defect within the complex. Owners could face costly assessments for repairs and legal fees. The litigation can often take years to resolve.

Is the complex FHA or VA approved?

If you are going to be getting an FHA or VA loan for your purchase, you need to make sure the complex is approved in order to obtain the financing.

How will these issues effect the future value of the property?

If your owner occupancy ratio is low, delinquency ratio is high, or the complex is in litigation; financing is almost impossible.  If people can't get loans to purchase the property, there is less demand, which drives the prices down. Cash buyers are looking for deals and they often find them in these "cash only" complexes. A majority of cash buyers are investors purchasing these units for rental properties which will eventually contribute to an even lower owner occupancy ratio. So, unless these lending guidelines change--If you have cash, you can get a great deal in the complexes that you can't obtain financing in, but it is a bigger risk.

When shopping for a condo, make sure you do your homework before you go out looking! It's never to fun to find a property that you love, only to find out that you can't have it.

Posted in:General
Posted by Dave Gubler on September 24th, 2010 6:43 PM



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