​While Fannie Mae has streamlined the process by which condo developments can obtain approval, the reality is that very few projects are approved. To see if a condo you’ve got your eye on is eligible for Fannie Mae or Freddie Mac financing, you can find a list online. Don’t be surprised, however, if your state has just a handful (or even zero) of condos listed.

If you’re financing a condominium purchase, plan on a little longer processing time. Lenders have to assemble a lot of paperwork before submitting a package to approve projects for mortgages. It can add some days to your closing, and this should be considered when you’re deciding to lock in an interest rate. 

What does the lender require from the HOA or Condominium manager? 
All Lenders will require the HOA to fill out their condo questionnaire, there are two types Full (Long form for max financing) or short form (limited review) limited review does require on average for the borrower to put more money as down payment. 

1. Lender Condo Questionaire 
2. Copy of the Annual HOA Budget for the current year
 An acceptable Budget  will include the following:
• Line item expense for Reserve account, separate from the Operating account.
• Line item expense for the insurance premium and deductible
• The name of the HOA must be shown on the budget
 3. Insurance Company Information:
Copy of the Condominium Project’s Certificate of Insurance for Property and Liability; Fidelity Bond Coverage (Employee Dishonesty), if over 20 units, and Flood Insurance, if applicable. 
More lenders are requiring all pages of the policy for review. 
4. Required Documentation for New Projects or New Conversions:
 Copy of HOA’s Declarations (CC&Rs) that have been signed, stamped and filed.
 Copy of all recorded addendums to the Declarations
 Copy of HOA by-laws and addendums
 
A full review is required for max finacing with Fannie Mae and Freddie Mac backed loans this means loan can have smaller down payment and can be a 30 year fixed for primary, second and investment propeties. The loan amount is limited to a max 417k (soon to be 424K)  5% down as a primary and 10% down for second homes. 
The guidelines of a full review are:

• 51 percent of units are owner occupied or second homes
• No single entity owns more than 10 percent
• Maximum commercial space is 20 percent
• No construction defect litigation. All other litigation will need to be reviewed.
• Budget–line item for reserve with at least 10 percent of assessments/income being collected
• No more than 15 percent of association dues delinquent more than 30 days
• Condominium rentals are not advertised with daily rentals or other hotel type amenities (minimum three-day rental period)
• Insurance coverage must be sufficient (hazard, flood, liability, fidelity and HO6 if required)
• Review of condo docs to address:

        a. Compliance with laws
        b. Limitations on ability to sell or first right of refusal
        c. Amendments to docs
        d. Rights of mortgagees and guarantors
        e. First mortgagees rights
        f. Unpaid dues
        g. Minimum square footage of unit is 400 square feet
        Limited and full project reviews have duration of 180 days.

 A limited review is conducted by the lender – it’s just a questionnaire that’s completed by the property manager or head of the homeowner’s association. To be eligible for a limited review, you must put down at least 20 percent for a primary residence or 30 percent down for a second home. Has the same loan amount limits as above. 

Limited review criteria are:

• Commercial space can comprise no more than 25 percent of the square footage
• At least 10 percent of association dues must be allocated to reserves
• Fewer than 15 percent of units must be in arrears with their dues
• More than half of the units must be owner-occupied
• Insurance must meet GSE guidelines
• There can be no lawsuits over safety, structural soundness, habitability or functional use
• No single entity can own more than 10 percent of the units unless there are five to 20 units; in that case, a single entity can own two units
• Minimum square footage per unit is 400 square feet
• Condominium rentals are not advertised with daily rentals or other hotel type amenities.

Q. What is a “Condotel”?
Gena:  We’re using the term “condotel” to include a broad group of properties which typically have one or more “Hotel” type characteristics. Typical features could include an onsite rental office; onsite commercial space(s) such as restaurants, day spas, convenience stores, etc.; PBX phone system; high-level guest services such as 24-hour check-in, daily maid service, concierge, valet parking, etc.
 
Q. Why is my choice of a lender to finance my condo purchase so important?
Gena: It’s important because in my years of selling condos in the financing attempts through inexperienced lenders have caused more problems than any other single factor, resulting in loan denials most of the time. This is also important because it is the easiest problem to prevent.
 
Q. Why can’t I just find the best residential mortgage loan program and use it to finance my purchase of a resort condotel?
Gena: Financing is often property-specific and certain loan programs will not work for certain properties regardless of the strength of the borrower. This concept is alien to some lenders. The reasons for this have nothing to do with the quality or location of the property.
 
Q. Why do lenders resell loans and why does this make a difference?
Gena:  The secondary loan market is set up for residential properties for primary residences, second homes, and investment-and there are guidelines to determine what properties qualify. If a property doesn’t qualify, the lender cannot sell the loan through one of the agency entities (Fannie Mae – Freddie Mac).  Lenders can still make money on loans they can’t sell (such as they do on commercial loans). However, since they tie up assets for potentially long time periods, the returns (interest rates) generally must be higher to justify these.
 
Problems arise with inexperienced lenders because many resort like condos are somewhat commercial in nature. They have onsite rental desks, daily maid service (like a hotel), onsite restaurants, etc. These are considered by many buyers and most visiting vacationers to be positive factors. Unfortunately, secondary loan market guidelines cause these type properties to be categorized as a “condotel” and therefore ineligible for the secondary loan market. This is what typically causes a residential loan on a condotel through an out-of-area lender to be denied at the last minute.
 
Q. Does this mean there’s nothing really wrong with a condotel?
Gena: There is nothing wrong with condotels just as there is nothing wrong with restaurants, hotels, office buildings or any other properties that could typically be described as “commercial” in nature. As previously stated, many of their characteristics actually may make them more desirable to a second home owner than a detached house.
 
 Q. Are the same loan programs available for all condotel buildings?
Gena: No. Available loan programs can vary significantly from one building to the next. Relevant factors may include the service level and the precise location of the rental desk (inside the building or not, for example), the size and configuration of the individual condominiums and whether or not there are timeshare units in the complex, just to name a few. Also, if a buyer already owns another property along the coast this could affect the loan. As noted, interpretations also vary over time and from lender to lender.
 
Q. Are terms and interest rates the same for condotel loans as they are for primary residence loans?
Gena:  Interest rates are sometimes slightly higher than rates for primary home loans and a larger down payment is sometimes required. Also, 30-year fixed rate financing is typically not available. The reason is that lenders consider these to be riskier loans than those for primary residences. If a borrower experiences financial difficulties, they will stop paying on their second home or investment loan before they stop paying for the roof over their head. Even more importantly, since these loans are typically not sold, any profit the lender makes is based on the “spread” between the interest rate charged to the borrower and the interest rate available to the lender. And since this is the case for the life of the loan, lenders want the rates to be able to adjust as prevailing interest rates change.
 
Q. Are condotel loans risky for the lenders that specialize in them?
 Gena:  In our area at least, these loans have historically had very low default rates. Most of the Buyers are relatively affluent with strong assets and reserves. They also typically have good credit scores which they will go to great lengths to protect. Of course during times of hardship such as the recent recession, defaults increase as they do with other types of mortgages.
 
Q. Does it matter which of the local lenders I choose to finance my resort condo purchase?
Gena: Yes, not all of our local lenders can provide financing for all properties. Lenders, like most service providers, often specialize and some do not have programs for condominiums.
 
Q. Condos are obviously not as easy to finance as detached houses. Should I be worried that there won’t be available financing when and if I try to sell my condo?
Gena:  Through the year’s working with condos, there has always been reasonable financing available for qualified buyers although the lineup of the “best” local lenders has changed frequently. This is a lucrative market for lenders and with baby boomers expected to buy millions of second homes in the coming years; it is unthinkable that no lenders would choose to take advantage of that opportunity.
 
Q. Is it ever OK to use a lender who does not have resort condo experience?
Gena:  Yes of course, a “Signature” Loan- In other words, your position with the lender is so strong that your signature will get you a loan regardless of why you’re borrowing the money. The lender is treating this as a ‘portfolio” loan which it does not intend to sell.  Commercial Loan- Some buyers put down more money and structure these as commercial loans. There still could be problems if the lender is not familiar with our market.
 
Q. What if I carefully consider all factors and still decide I don’t want Condotel financing terms?
Gena:  The easy answer is to simply buy in a property (Condo) that is eligible for conventional financing (Warrantable Condo it meets Fannie Mae guidelines). There are plenty in our area. Ask me to help you find these properties. The rules are confusing and the list of eligible properties changes frequently as rules are periodically changed or as interpretations change.  The other solution is to pay “cash”. This is not necessarily as difficult as it sounds. Many “cash” buyers actually just borrow against some other asset which gives them more favorable terms. Home equity loans, leveraged stock portfolios, etc.
 
Q. This sounds so complicated—how will I learn all this?
Gena:  Good news you don’t have to. Your experienced agent who works with condos can help you.  Experienced condo agents constantly monitor the local competition so that they can help their clients connect with some local lenders that can service their needs.    

Fannie Mae is the true standard to which lenders are underwriting too; even the jumbo lenders are following the Fannie guide for the classification.  Today there are three classifications for condos they are “warrantable”, “non-warrantable” and “condotels”.  

A warrantable project is simple, it just infers that it meets the guidelines for Fannie Mae and therefore suitable for their financing.   This is a fairly simple process for lenders to quickly let you know. They will ask for the HOA to fill out a Condo questionnaire, and they will ask for a copy of the budget (reserves are an important line item -10% required) a current balance sheet, copy of the full property insurance and liability policy.  

 But the question I been asked is why does this approval vary where one will say this complex is approved and another will say it’s a condo-tel.  
When looking a project/complex, look to see is there a rental desk on site, does the HOA participate and/or earns money from rental of the individual units.  These are traits of a condotel.  We do have lenders who lend on condotels and it’s on a loan by loan bases. Even for jumbo loans up 80% for second homes.

Although some of the condominium property requirements may appear arbitrary, the rules exist to protect both the borrower and the lender. Rules are different for small properties (two to four units) versus large properties; there are different rules for new construction and new conversions and the rules can change with jumbo loans versus conventional financing of 417k or under.

Lenders want a high level of owner occupancy in all condo associations. Owner occupants/second homes are considered more likely to maintain their property, pay all fees on time, and manage assessments or fee increases if required. Statistically, investor owners will stop paying their fees and even the mortgage if their personal finances get snarled, which can weaken a condo association.

Additionally the lender needs to verify that all condo fees are collected and up to date, no more than 15% of the total units can be past due on their condo fees.

They will verify that there are no pending law suits against the association that are not covered by the master insurance policy or any other issues that could negatively impact the condominium finances.

When lenders receive the appraisal, they look for few more items, zoning, is it in compliance, flood zone, does the numbers listed by the appraiser match questionnaire given by the HOA.  Looking to see does the HOA have full ownership of the facilities.

 Also many lenders offer limited review and this requires a little more down payment but in many cases more attractive for the buyers because it allows for the lender to require fewer items from the HOA and the buyer.  

There seems to be a lot of moving parts when financing a condominium, especially if it’s your first time to buy a condominium, but there skilled people in our area that can make this process go smoothly.  They can quickly answer the questions of the required down payment, how much reserves you need, 30 year fixed vs. arms.  
 
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