Buying a condominium unit is probably not as simple as you think. Of course, in the post-recession wake of the real estate and mortgage meltdown of the 2000s, qualifying for a mortgage to buy anything can be quite a challenge. However, most people probably do not know that there are additional hurdles and potential roadblocks to financing and purchasing a condo.
We do not have many condominiums in the West Chester, Pa., area but there are plenty if you venture out to nearby Philadelphia, Wilmington, or other surrounding areas. Some local townhome projects are actually considered condominiums, and the future may see increased usage of condominiums to help cope with the conflicting needs to preserve our green space and to provide residences for an increasing population.
Condo Financing ComplicationsLocal mortgage expert Ken Feinman of Approved Mortgage in Doylestown says that buying a condo nowadays can be very challenging if the condo is not already approved by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored entities (“GSEs”) that buy mortgages from lenders and sell them to investors. The catch is that in order to be purchased, the mortgages have to meet the GSEs’ requirements and be deemed “conforming”. And for condominiums, there are extra requirements for loans to be deemed “conforming.”
Feinman says that some of the additional requirements for condos include production of a 90-day homeowners’ association (HOA) budget statement, a master insurance policy for the project, fidelity bond coverage (insuring the association against losses incurred as a result of fraudulent acts), proof of an HOA reserve of at least 10 percent of its budget, and a completed “condo questionnaire.”
The condo questionnaire includes 20 or so questions about the project that will help determine whether the project will be backed by the GSEs. If the project fails any of the questions, the project does not meet the requirements for conforming loans. One requirement is that a condo cannot have a single entity, individual or group own more than 10 percent of the total units. If it contains commercial space, the condo also cannot have more than 30 percent of the total square footage devoted to commercial space. Further, if there is litigation pending against the HOA, especially if the issue is structural, conventional financing will likely be blocked until the litigation is resolved. These are just a few of the many potential things that can block conventional financing for condominium purchases.
Feinman notes that if you are considering purchasing a condo, a “red flag” for a problem project is if the condo has only seen “cash” transactions that did not involve conventional financing. Feinman says that about 95 percent of purchases involve conventional financing. So, if you’re seeing a lot of cash deals, conventional financing may not be an option.
Mortgages can also be government-backed by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and the US Department of Agriculture (USDA). Feinman says that an entire condo complex must be on the FHA’s approved list before you can use FHA financing for a purchase. To learn if a condo you’re considering purchasing is available for FHA financing, visit https://entp.hud.gov/idapp/html/condlook.cfm. If approval is not already in place, we are warned that the approval process can be nightmarish and long-probably months, and certainly longer than the traditional 45-60 days typically allotted for closing a transaction.
More Condos ComingOur area doesn’t have many condominium projects, but that may not be the case for long. Wayne Megill, local developer and CEO of award-winning builder Megill Homes, says that there are many reasons why our area is ripe to see more condominium projects in the near future. Megill says that “condominiums can be useful as a mechanism for dealing with the competing demands being placed on zoning authorities, which call for both providing housing for a growing population and preserving green space.”
Megill’s latest project, Jefferson Square at Media, is a luxury townhome development in downtown Media. The townhome project qualifies as a condominium because the units are part of a new wave of “stacked” townhomes that are sprouting up in the area. Megill’s condominium/townhome project will enable more people to live in popular downtown Media and the project is just now finalizing its Fannie Mae approval. The process had its headaches, but as we try to find room in our popular area for more people, more condominium projects may be the necessary direction of the future.
Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester, PA. For buyer or seller representation, or for more perspective on the local and national real estate market, please email ryan@waynemegillteam.com and visit The Wayne Megill Team blog at http://www.PAHomesAndRealEstate.com.
