Financing Condos in a Resort Market Like Destin Can Be Tricky for Buyers and Sellers!
Same thought also applies to buyers as well. Choose an agent who knows condos! Someone who understands that if you want to finance then focus on what is available to you. This includes upfront having the discussion about what your goals are in purchasing a condo, what kind, max price, income generated, and how much you can put down. (Very important as the financing changes with down payment.) Just the other day I got a call from a frustrated buyer who had been working with another agent. The agent was very nice and seems like a good fit in the beginning but as they got into looking and making offers they became very frustrated with the process. See, the agent showed them many units in their price range and got them very excited but never asked them if they were financing and if so how much are you putting down (down payment). The agent showed them condos in 300k price range as asked by the buyers. But failed to know they were only able to put down 10%. Many of the condos that the agent showed (and got the buyer excited about) required 30% down or 60k more in down payment! Unfortunately this was unrealized until offer time. What a waste of the buyer’s time with them being here for only a week.
How even a strong borrower gets denied.
Financing condominiums along Florida’s Gulf Coast can be a very tricky process. The difference in financing a condominium compared to single family homes is that lenders are required to get the property approved in addition to merely approving the borrower. This is the main reason that I would NEVER recommend that a buyer use an out-of-town lender when financing a condo in Destin and the surrounding area. Lenders that are not located in this market are not familiar with our properties. Many of them have very unique characteristics which can make them difficult to get approved. Most out of state lenders are not familiar with these nuances. It is important to note that a loan can be denied because the condo is not approved no matter how strong a borrower is with credit/income. Even if the borrower has a top-tier credit score, high down payment, and low debt ratio, a lender will still deny the loan if they determine that the condo building has certain characteristics.
There are many reasons why a lender could deny a condo for financing. Here are a few:
- The (HOA) may not allocate enough of their annual revenues to a reserve fund. (This is a big one)
- The HOA may not carry adequate insurance coverage. (This can be fixed if HOA is willing)
- There is too large of a percentage of investors as opposed to homeowners. ( If owner Occupied or 2nd Home this no longer is a issue)
- Too many unit owners may be delinquent on their monthly HOA dues.
- Condotel classification – The most common reason that I see a condo denied is that the out-of-market lender has classified the project as a “condotel” (Fannie has it on its un-available)
Many out-of-state lenders will not determine until several weeks into the process that the project does not meet their requirements. When this happens they deny the loan. Sometimes these denials come in the 11th hour of the loan process. This denial often happens after the lender has had the HOA complete a condo questionnaire; and this often happens after the borrower has paid for an appraisal and/or inspection quite often, these lenders will deny a building when a local lender could have actually approved the condo for conventional financing. Federal lending guidelines thru Fannie Mae and/or Freddie Mac do not necessarily classify a condo as a condotel simply because the project offers nightly rentals—but many out of town lenders will tell a borrower they cannot proceed with their loan as soon as this fact is uncovered! Generally, a local condo lender can or already has reviewed the condo project, to determine that the out-of-market lender is incorrectly classifying the condo project as a condotel. When this happens, the buyer is able to obtain a regular, conventional loan. This means better interest rates and terms too.
Lastly, most out-of-town lenders are not going to have a condotel loan program available in the event that the condo is accurately classified as a condotel. With many of the local condo lenders, they do offer condotel financing if the building is indeed a true condotel.
Call me and I will happily discuss your goals and needs and see if our team of condo specialists can help you find that perfect condo!!!