I’m going to open this up this article with a shocking revelation:
Condominiums are not the same as single-family homes. 
Lenders do not view condominiums in the same way as single-family homes. There are additional risks that are considered, additional documentation that must be obtained, the result of which is that purchasing a condominium can be tougher than it seems. Let’s take a look at a few factors that are considered in evaluating condominium mortgages, and at the 5 ways that condos can be approved for conventional financing.
Completion
Banks are most concerned with the aspects of a condominium that can impair the future value and marketability of the property. A condo unit in a complex can be only as valuable as the complex as a whole. As a result, banks want to know about the degree of completion. Specifically, it is important to know if construction of all units in the complex or phase is completed.
Banks will also ask if all common elements are completed. Why? As a unit owner, you will hold title to 1.17% (or whatever percentage it is) of all common elements in the development. If the common elements are not completed, the property is worth less than might be expected. Likewise, if one or more units are not completed, the value of other units can be hurt. For a bank, the worst case scenario is that pending units remain uncompleted, reducing the number of units paying association dues. Also, as we are seeing with foreclosed homes, unoccupied, non-completed properties are a blight on all those around them, and have an adverse affect on value.
Occupancy and Ownership
Another question banks will ask about a condominium development regards occupancy and ownership. What does this mean? History and research have shown that mortgages on properties occupied by their owners are less likely to default. Similarly, condo complexes occupied by unit owners will tend to be better investments for lenders, as people tend to take care of their homes.
To account for this, banks will ask what percentage of the units are owner occupied, looking for a 51% or higher ratio for approval. Unsold units in a new development will be considered non-owner occupied for this calculation, which makes financing more difficult for the first half of such units.
Ownership is also a major consideration, as concerns arise when a development has a small number of owners holding a large number of units. This can be a concern, as one or two owners holding a significant proportion of the units could block capital improvement projects in the future, potentially risking the value of the complex.
Specifically, banks will want to know if any one entity owns more than 10% of the units, and will typically avoid financing such a complex. The one exception to this rule is new developments, where the developer is typically exempted on all previously unoccupied units. 
Other Factors
Banks are also concerned with several other aspects of the condominium’s administration. The association board is typically controlled by members of the association, however, newer complexes are often administered by the developer until a sufficient number are sold. Banks will ask about who controls the association, however this is typically not a problem so long as a plan is in place to transfer control of the association to the unit owners, and the association is sufficiently capitalized.
A popular method of building new-built condominiums is in phases. Phasing permits a developer to build little by little, reducing the capital requirements of a large project. This can be very beneficial to the builder, as it helps to maintain liquidity, and reduces carrying cost for unsold units. In some cases it can present problems for lenders, especially if upcoming phases include common.
We’ve reviewed the significant factors that are a part of the condo approval process. For a breakdown of the 5 available methods of obtaining condo approval, please continue to part II.
Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.
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