By Harold Copher, Jr. Willow Bend Mortgage
Buying a condominium or townhouse seems to check off a lot of boxes for buyers on both ends of the homeowner spectrum — first-time homebuyers “easing” their way into the responsibilities associated with homeownership, and those looking to downsize into lower maintenance known as “lock and leave” living.
Buyers know better than to delay visiting their REALTOR until they need to move in a month later. The same can be said for financing. I always suggest that clients first meet with me when there are no real time constraints.
When you think about it, a condominium is more accurately described as a form of ownership as opposed to a building type. You can find office condominiums, site condominiums, as well as a multi-unit single story, mid-rise or high-rise developments. What makes the ownership unique is that you don’t actually independently own a piece of ground. You own your walls and living space and, along with the other owners, a percentage of the common areas.
Condominiums have a Homeowners Association (HOA), or a Condominium Homeowners Association. Dues are collected by your condominium association to fund maintenance of property in which you have an ownership interest. Other developments have HOA dues that fund maintenance for property which is owned by a separate entity, the HOA. Common areas have no separate title in a condominium association.
Mortgage guidelines require an assessment of the buyer’s credit worthiness and ability to repay, but there is also a requirement to assess the collateral for the loan. That process is a little more complex when you are purchasing interest in a condominium. Lenders view the condominium’s shared ownership as a unique risk factor since the condominium ownership group can impact the value of the unit you purchase. The financial stability and owner profile for your collective group of co-owners in the association has more influence on the condominium’s value and maintaining that value over time with this type of ownership structure.
Mortgage lenders will classify condominium properties as either “warrantable,” or “non-warrantable.” A warrantable condominium project can be eligible for virtually the same conventional financing programs as a single-family home or townhome property. However, a non-warrantable condominium project will likely require a larger minimum down payment, come with a higher interest rate, and all term offerings may not be available.
The condominium’s homeowners association (or its management firm) is required to provide information to the lender relative to the financial stability and ownership status of the association in the form of a condominium questionnaire or certificate. Whether a property is considered warrantable or non-warrantable is dependent on a combination of many factors, but the two your mortgage lender will screen immediately are (1) the number of units that are owner-occupied, and (2) the allocation of ownership. Of equal importance are acceptable insurance coverage, potential ongoing litigation and the current financial status, including reserves and dues payments in arrears.
Historically, owner-occupied properties are better maintained. In general, lenders are verifying over 50 percent of the units to be owner-occupied as primary residences or as second homes. Lenders want to see a target percentage of units owned by one individual or entity around 10 percent or less. If you have a single owner with over 10 percent of the total units, their financial participation is likely critical to your condo association’s stability.
The takeaways here are: (1) if you’re considering a condominium purchase, recognize there are two basic categories, warrantable and non-warrantable, and the financing options for the two types are distinctly different. Also, the warrantable or non-warrantable designation has the potential to change moving forward. In reality, it’s almost a certainty that your partners in the condominium development will change over time. Their housing needs and lifestyles may change. What was once a primary residence has now become a rental unit, and vice-versa.
Our area has many great condominium properties available, and they may be a perfect fit today — just remember that condo owners’ needs will change, and that will reshape the community. RL