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Jun 28

Condo Approvals Not Required

Why is it Hard to Finance a Condo?

Financing a condo has always been tricky. In the last few years it has become almost impossible. Conventional and FHA guidelines have both changed the approval process to get a condo community approved. The irony based on my personal experience is that all of my loan applications in the last year from people buying or trying to refinance a condo is that they all had top-tier credit profiles. If I separated all of my applicants based on the type of property without question those attempting to finance a condo were by far better credit candidates, not even a close call.

So if this is true with other loan officers why is it so difficult to get a condo community approved for a traditional mortgage? The answer lays in the mortgage guideline changes I mentioned above. 

First let’s look at FHA. For as long as I can remember once a condo was FHA approved it was good to go, the approval never expired. That changed drastically last year, now all FHA condo approvals must be renewed every two years. That means someone local associated with the property must fill out paperwork, gather documents, figure out some ratios and then send all of this junk to FHA and do it every 24 months. By the time you finish one cycle it is almost time to start getting ready for the next review.

Second, the conventional review process can go two directions; one covers the entire development and makes the approval status available to any lender and the other is lender specific. The full-blown approval process is very expensive therefore seldom used in our area. The second method is  CPM which I believe stands for Condo Project Manager and it is basically free or I should say lender funded in most cases. CPM is preferred by the consumer or the Home Owner’s Association because it is free. But it is a constant source of trouble because every unit and every mortgage application requires running CPM. What a pain.

The third problem is most board members serving on their Home Owner’s Association are doing so voluntarily. They are just normal people like you and me but are trying to manage their community. Few, if any, have experience managing a multi-family project. Well-meaning attempts to balance a large budget can cause the best run HOA’s to pass by-laws that will cause their property to wash out of the mortgage approval process. One wrong answer during the CPM process will cause a property to be declined.

A Solid Solution for Some Condos

I had calls last week by board members from two different communities asking for help sorting out the mystery of financing a condo. For a year I have predicted that new developments will shift away from being condos to fee simple title similar to row houses in Boston or Chicago. The new communities could still have HOA’s for taking care of common elements like a club house, pools, sidewalks, etc. The difference is in how title is held, my idea is for the owners to actually own the land under their unit instead of just owning the interior of their unit. Of course this requires no upper units, only one unit to a footprint.

So while brainstorming with one board member I asked if their community had any upper units, nope, all ground level. But no one could get approved for traditional financing, FHA or conventional. So I tossed out the idea of not being a condo, Un-Condo is what we decided to call it.

This solution is something they had not thought of but I thought it was a resolution to their problem. If their community is not a condominium development is does not need a condo approval to get financing for a unit. No condo, no condo approval needed.

I was a zoning commissioner in a previous life so looking at development ideas and preliminary plans is nothing new. But it is always a good idea to bounce a new idea off someone you trust. I tossed it out to a couple of other loan officer and they gave it thumbs up. Next I ran it past another mortgage banker and got another thumbs up.

Next stop was legal, ran it past a couple of attorneys that are experts in mortgage matters. Not only did they agree but one said a recent law in Kentucky addresses this very subject,

I read the Kentucky Statute and not only does it tell how to do it, but it says the move does not require a unanimous vote.  Only 80% of the home owners need to vote for the proposition to make it happen.

This post is continued here.

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  1. Condo vs Un-Condo, cont. - Jim Simms - The Mortgage Hub » Jim Simms - The Mortgage Hub

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