Condo Financing and Why Condos May Become Exclusively 55+

I love my condo. I am within walking distance to restaurants, UW Badger games, Mondays Pub, and my amazing downtown real estate office. Downtown Madison doesn't offer many single family homes, and those that are available are generally either very expensive, or in poor condition. So for those of us who love living downtown, condos are a fantastic option for more affordable living in brand new construction.

So, that being said, you can imagine my surprise when one of my buyers recently told me he spent four hours researching condos on a Sunday (he's not a big football fan, obviously) and found them to be a poor investment. Poor investment? Really? Nationally, condos appreciate faster than single family homes, and buying a downtown condo is one of the safest investments you can make. However, he actually was right - with new lending regulations and Congress getting their regulatory wish list fulfilled daily, it will become increasingly more difficult to obtain financing for a mortgage on a condo.

AIG recently released a statement saying that they would no longer finance condo purchases in "declining zip codes." They published a list of hundreds of areas where they felt that the condo market was declining and therefore not worthy of their money (*cough* bailout, our money *cough*). Now, condo owners in Madison, before you start to panic, Madison, WI is not on their list, which is yet another indicator that Madison's real estate market is not dire as many other areas, such as Arizona.

Ok, so if you want a condo, don't call AIG about financing. Check. Who do you call? That depends. If you have the means to put 20% down, call any lender. If you don't, you may want to shop around. Fannie Mae and Freddie Mac recently put more financing restrictions in place to make it difficult to obtain financing on a condo if you do not have a large down payment. Both firms said that they will not offer Private Mortgage Insurance for condos in developments where less than 70% of units are sold (up from the previous 51%), for developments where 15% of unit owners are delinquent on association fees, or where 10% or more of the building is owned by investors (read: landlords for the renters who actually inhabit the units). What does this mean for lenders? It means that obtaining financing for buyers who have less than 20% to put down will be time consuming and expensive. 

But let's look at this objectively. Fannie and Freddie are actually just protecting you from yourself. Buying a condo pre-construction can be a great way to get an amazing price, plus the added fun of being able to pick out light fixtures, flooring, cabinets, etc. However, you do run the risk of buying into a building where you are the only one who appreciates it. I myself nearly did just that - I seriously considered The Colony on Blair St. a year and a half ago when I was in the market. Had I done that, I would have moved into a 20% occupied building that would later implement a rent-to-own program for new residents. 

Now, before you write off condos forever, here are a few things to think about. They are still going to be a wonderful option for empty nesters and seniors (who can most likely afford the 20% down payment) looking to downsize and decrease the amount of maintenance needed, and are still attractive housing for areas where there are not many other options (such as downtown Madison). Also, 30 year fixed rate mortgages are not the only kind of loan out there. I'm not recommending the exotic loans, such as 2-year ARMs, but you can get yourself settled into a nice 7-year ARM and refinance (or more likely if you are younger, move) before the interest rate terms fluctuate. And don't forget to consult your friendly Realtor (aka, me) about the developments you are interested in. We know the markets and will help steer you to a lovely home and a sound investment.