Last week, we looked at some of the most significant factors that are considered in condominium approval. Let’s examine the 5 methods allowed for approval of a specific condo.

Fannie Mae / FHA Approval

Fannie Mae and the Federal Housing Administration used to approve condominiums following an exhaustive process that involved extensive questionnaires, appraisals, review of hundreds of pages of condo documents, and, as often as not, site visits. As the housing market has worsened, the expense of performing these reviews was no longer justified. Despite their termination of this process, both FNMA and FHA maintain an extensive list of approved condominiums, and many lenders utilize this list as the basis for accepting condos as collateral.

Limited Review

A limited condominium review can be approved if a project is established, and if the buyer’s qualifications are strong enough. A limited review will be called for in the initial automated approval, and is typically granted only to borrowers with stronger qualifications and larger down payments. Recently, I have only seen limited reviews approved for buyers with at least 10% down payment and 720 credit scores, but for buyers with these stronger qualifications, a limited review is a very simple way to purchase a condominium.

What constitutes an established condominium? To be considered “established”, a condominium must be 100% complete, including all units in all phases, and all common elements, and the unit owners must be in control of the association.

Condo Project Manager

Condo Project Manager, or CPM, is an automated system provided by Fannie Mae that operates for a condominium much the way that Desktop Underwriter works for homebuyers. Once all the relevant information has been gathered, the closing attorney will be asked to provide a specific letter of reference, at which point the underwriting lender will be able to input data from the appraisal, and the condominium questionnaire, hoping to receive a good result from the system. Assuming acceptable findings are returned, no further approval is required for the condo. If not, there is one option left.

Full Condominium Review

Quite possibly the most paperwork intensive process in all of mortgage lending is the full condominium review. Condominium documents typically consist of one hundred or more pages of legal description, plans, and specifications, and must be considered line-by-line in determining eligibility, in a process that typically requires 3-5 business days after all documentation is submitted. Because of the degree of detail required to complete full condominium reviews, not all lenders offer to perform these reviews. If you believe your property may not qualify using the other methods, it is important to ensure the lender you are using offers this option.

A Few Insurmountable Hurdles

We’ve looked at several different methods by which condominiums can be approved. Before closing, let’s take a quick look at a few conditions that make condo financing nearly impossible.

Investor concentration: If more than 50% of the project’s units are owned by people holding them as investments, obtaining institutional financing is nearly impossible. Many Alt-A lenders offered “non-warrantable condo” financing until recently, however most have stopped. NB: the 50% figure will also include unsold units, so in a 3-unit complex, financing the 1st unit in is quite challenging. Recent success has been seen in such complexes where 2 units are sold to separate, owner occupant buyers, at the same time.

Incomplete construction: If construction is still in process for the complex, apart from construction of phases other than the subject unit’s phase, it is very challenging to obtain financing. Banks are concerned that the developer may be unwilling or unable to complete construction, thereby impairing the value of other units.

Ownership concentration: This refers to the percentage of units owned by a single entity, excluding the developer. Banks are concerned that if a single person owns more than 10% of the units in the complex, that person may have enough influence with the condo board to force decisions that are not beneficial to the project as a whole. For smaller projects (10 units or less), this rule is still in place, but is modified such that no owner may own more than a single unit.

Condominium financing is different from mortgage lending on non-condominium properties, but it doesn't have to be scary. Knowing the right way to get a property approved will alleviate most problems. Of course, this is not a comprehensive review, however, it is my hope that this will provide a good overview of the condo approval process, and some of the pitfalls that can be avoided. If you have condominium questions that aren’t answered here, please contact me directly.

Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.