Home buyers interested in purchasing a condo or townhouse must be aware that not all condo or townhouse projects qualify for financing. The project must meet certain minimum standards to qualify for financing. If you are interested in purchasing a condo or townhouse, here are the top 4 things you need to know about ANY condo or townhouse project:
#1 – Are There Any Pending Lawsuits?
Is there litigation on the property? Condo projects are being sued all the time. Depending on the type of law suits pending, a condo may or may not qualify for financing. If there is litigation, request a letter from the attorney “summarizing the complaint” and give it to your loan officer to see if financing is an option for this condo project.
# 2 – Are There Any HOA Delinquencies?
You would be surprised how many home owners pay their HOA fees late. If more than 15% of the condo owners are delinquent on their HOA dues, banks will most likely not lend on that condo project.
#3 – Is More Than 10% Owned by Just One Entity?
If one person or one entity owns more than 10% of the total units in any given condo project, most banks will not lend on that condo project.
#4 – Reserve Funds in HOA Bank Account
Lenders require 10% of the yearly HOA budget being collected for “reserves” as a line item expense on the actual budget. This is a consistent collection requirement each and every year. If the amount being collected for reserves is less than the 10% minimum requirement, then a reserve study would need to be provided to support the lesser amount being collected. Otherwise, this would likely cause the project not to be eligible for financing.
Fun Fact: A good lender may make exceptions to some of these issues.
Condo projects with more challenging issues may not qualify for conventional financing, but alternative lending options tend to be available for almost any property. A good rule of thumb is the more challenging the issue, the larger the down payment requirement and the higher the interest rate.