Financing Non-Warrantable Condominiums
During my conversation with a condominium attorney in Alabama regarding amending the legal documents to prevent future leasing, we moved on to financing options for the units in this project.
When a condominium project cannot meet FHA’s, Fannie Mae’s, Freddie Mac’s for the VA’s guidelines, financing becomes extremely difficult. These units are referred to as “non-warrantable” and many different facets of a condominium project can lead to this determination.
Some examples that can render a project to be non-warrantable include being a condo-hotel (front desk, maid service, etc.), the existence of a leasehold estate, minority of owner-occupied units and one entity owning an excessive number of units.
So where can be done to finance units in these projects?
This is not an easy question to answer and it could depend on what part of the country you are in. Let’s tackle some of the easier solutions first…
Fannie, Freddie and the VA say that one entity cannot own more than 10% of the units in a project. However, FHA allows up to 50% of the units to be owned by one entity so long as the owner-occupancy ratio is at least 50%.
When calculating the investor concentration of a project, FHA will count pending sales to buyers who intend to inhabit the units as owner-occupied units.
If an investor owns many units in a project but lives in one of the units as his/her primary residence, FHA considers this to be an owner-occupied unit.
If the project is newly-constructed and still in the marketing phase, units owned by the developer that are not or have not been previously inhabited are excluded from the calculation. Units that are owned by the developer and that are being marketed are not considered investment properties and are exempt from the calculation.
Investor Concentration More Than 50%
FHA requires that at least 50% of the units are to be owned by owner-occupants. While Fannie Mae limits the percentage of units one entity can own to 10%, it does not place a restriction on the total investor concentration if the subject loan is for an owner-occupant. This means that even if a project has less than 50% owner-occupants, Fannie Mae will allow a loan to a buyer who intends to inhabit the unit. Of course, the project will have to meet all other Fannie Mae guidelines.
Most lenders who offer conventional financing have their own overlays in place to mitigate risk. I only know of one lender who will provide conventional financing when the investor concentration is above 50%: Sierra Pacific Mortgage.
Sierra Pacific follows straight Fannie Mae guidelines. This is a national lender that is licensed in 48 states and provides financing at the wholesale and retail levels. In New England, New York and Florida, my good friend, Joe Petrowsky, utilizes Sierra Pacific for units that are tough to finance.
Budget Issues/Lack of Reserve Funds
FHA, the VA, Fannie Mae and Freddie Mac have minimum standards for the financial qualifications of a condominium project. These include minimum budget standards, minimum annual contribution to a reserve account and a minimum balance for the reserve account.
Fannie Mae allows “limited project reviews” for well-qualified borrowers. Fannie’s Automated Underwriting System (AUS) makes the determination if the borrower qualifies for a limited project review. [Notice that I said that the borrower qualifies, not the condominium.] If the AUS findings allow for a limited project review, the lender is not required to review certain aspects of the project which includes the project’s financial statements.
I have spoken at length with my good friends at Freedom Mortgage about limited project reviews and how a borrower would qualify for one.
“Well-qualified” borrowers are determined by the AUS based upon the borrower’s credit scores, income, assets, down payment and whether the borrower intends to occupy the unit. Typically, a strong borrower with a 20% down payment who intends to occupy the unit will qualify for a limited review. It is rare – but possible – for a borrower to qualify for a limited review with as little as 10% down.
Those are some of the easier solutions to tough condo financing. Tomorrow, I will post More Financing Options for Non-Warrantable Condominiums which will provide options for tougher condo units.
Image courtesy of Stuart Miles/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at email@example.com or call me at 404-433-4565. I will be happy to answer any of your questions.
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Check out our article in Common Interest magazine on page 19!