We have received many an email detailing how buyer have been told they cannot purchase in certain complexes or their offers were rejected because of ratios.  This is not because the Sellers are not wanting to accept FHA financing or Conventional financing it because of the ever evolving lender guidelines.

This is basically the current issues with Conventional financing or those loans being repurchased by Fannie Mae or Freddie Mac with condominiums:

Recently, several of our lender partners noted two new mortgage fees implemented by Fannie Mae affecting condo buyers — a .75% condo add on fee and a 1.75% additional fee for investors — both applicable to loans with a loan-to-value rate greater than 75%.

Well, there’s more. Effective March 1, 2009, Fannie Mae is implementing condo guideline changes “in light of the current condo market and the need to mitigate risk on condo loans”. Some of these changes may affect a buyer’s ability to obtain conventional condo loans for new and established condos.

A condo project is “established” if 90% of the units have been sold, is complete and the HOA has been turned over to the owners. A condo project is “new” if less than 90% have been sold, is not completed, is subject to phasing or if the HOA has not been turned over to unit owners.

Overview of Fannie Mae condo guideline changes:

  • For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract). This is being increased from 51%.
  • No more than 15% of a condo project units can be more than 30 days delinquent on HOA dues. This is an existing guideline that is now being applied to new condo projects. The calculation was also changed from being 15% of HOA fee payments to 15% of total units.
  • Fidelity insurance will be required for condos with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condos.
  • A requirement that borrowers must now obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
  • No more than 10% of a project can be owned by a single entity.
  • No more than 20% of a project can consist of non-residential space.
  • The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

According to a Fannie Mae, the guidelines can be modified for condo projects on a case-by-case basis. Therefore, these guidelines may not apply to all condo projects.

Most lenders follow Fannie Mae guidelines and as you see above it just makes it more difficult (but not impossible) to close deals in some complexes.  These issues can affect any complex, good and bad.

The 15% HOA rule changes on a daily basis in some complexes.  As units are foreclosed on they start over as the delinquent HOA dues are written off and also when collection accounts come in etc.  Jasmine in Elk Grove had approximately 36% of the HOA units delinquent at one time in the last several months BUT we were still able to attract a cash buyer who just closed a short sale with us in that complex.

Why does Fannie Mae issue these guidelines?  Risk.   Its all part of the risk factor they have to take in consideration when deciding when to purchase loans.  Remember what happens is a lender makes the loan to you and then in a good portion of the cases resales it to Fannie Mae and relends the money out to the next borrower.

We’ll go over more of these requirements as they developed and we’ll go over the proposed FHA changes in the next few posts.

As always, if you have questions about financing in a condominium complex, email us at info@SacramentoCondos.com and we’ll get the up to date information from one of our lender partners.

Bruce Slaton

SacramentoCondos.com