How your neighbors can tank a condo loan!
Some lenders can make condo buyers with pristine credit feel like rejects. Blame it on the building.
Before making a loan to a would-be
buyer, lenders comb through the building's financial statements to see
if too many condos remain unsold, or if units are mostly rentals instead
of owner-occupied. Lenders also look to see if the building's cash
reserves, which help cover maintenance costs, are too low.
These factors—which have nothing to do with a potential buyer's finances—can put a chokehold on a loan.
A lot of condo buildings don't make the grade. At national lender
EverBank, for instance, roughly 30% of condo mortgage applicants
encounter a roadblock due to the building's finances. "A perfect
borrower can't fix a bad project," says Tom Wind, executive vice
president of residential and consumer lending at EverBank.
Shaky condos have been popping up more
frequently over the past two to three years, even in luxury buildings,
says Zeke Morris, president of the Chicago Association of Realtors.
Real-estate agents say they're also prevalent in other markets,
including Houston and Miami.
In general, lenders say they view
condos as riskier purchases than other homes. Much of that stems from
condo-association fees. If existing owners are behind on those payments
or many units remain unsold, monthly fees are likely to rise to help
At some point, lenders argue, those expenses could rise to a level
where an owner can no longer afford to pay the fees and walks away from
the property, leaving the lender with the outstanding mortgage. That's
why, currently, it is almost impossible to get a mortgage—regardless of
your wealth—if more than 15% of condos in a building are behind on dues,
says Jeff Gennarelli, president of Bridgeview Bank Mortgage Co., based
in Lombard, Ill.
But luxury buyers have alternatives
besides paying all cash for the condo. One is private mortgages, loans
that lenders hold on their books rather than sell to the government.
They tend to be larger than traditional loans, require larger down
payments and are often offered only as adjustable-rate mortgages. Rates
are also generally higher than traditional mortgages.
Private loans are sometimes the only
source of financing for condos sold in luxury hotels and in buildings
where more than 20% or 25% of the units consist of commercial space,
like restaurants and shopping malls. They're also common for a condo in a
new building where a certain percentage of the units are still owned by
To find such a loan, borrowers should consider a community bank or
other local lending institution where they have a lot of assets or where
they have been banking for years, though an existing relationship isn't
always required. Or they can ask mortgage brokers who may know a lender
willing to fund such a loan.
The opportunity for profit is partly
why these lenders take on the risk when others won't. Whatever leniency
they offer on a building's finances they often make up for by imposing
strict lending requirements, including high credit scores, says Eddie
Hoskins, president of First Florida Financial Group, a Fort Myers,
Fla.-based mortgage broker that arranges such loans.
Some points to consider when applying for a condo loan:
Get an early start: Buyers should ask
lenders for the list of criteria the building will need to meet; then
real-estate agents can provide those answers when potential buyers shop
The type of building: Some condo
buildings have a greater risk of not being approved for financing.
Jonathan Cherry, senior mortgage banker at Wyndham Capital Mortgage
based in Charlotte, N.C., says buyers who want to avoid financing
complications might want to stick to mid- to larger-size buildings that
are mostly owner-occupied.
Large down payments: With a private
mortgage, borrowers often need to make at least a 20% to 30% down
payment if it's a primary residence. If it's a second home, they could
need to put down at least 40%. For investment purposes, cash is among
the few options, since a mortgage may be impossible to get.
Rising costs: With adjustable-rate
mortgages, rates could be low now but rise in a few years, thereby
increasing the monthly mortgage payment. And borrowers could still end
up with rising condo dues if the other owners in the building hit hard