I was recently helping a first-time buyer close on a condo in Renton highlands. Everything was going well until the loan underwriter hit a snag regarding the health of the homeowner’s association (HOA).
Condos have lots of wonderful benefits and often appeal to first-time buyers. The HOA can make life simpler by taking responsibility of maintenance for common areas, such as the roof, siding, foundation, and structure. This benefit can make owning the home easier, but closing a condo purchase is more complicated than most ordinary transactions. The HOA is a non-profit corporation that collects dues from members and spends it on important projects. Like any corporation, some are well-run and healthy. Some are troubled.
It turned out that the delinquency rate was somewhat high in our situation. The HOA was owed about $32k in unpaid dues from its members. We were eventually able to close the deal, but this experience is a reminder that lenders care about the buyer, the property, and the HOA.
Most loan originators sell their loans to Fannie Mae, and therefore follow Fannie Mae underwriting guidelines. FHA and portfolio lenders have different standards, but Fannie Mae loans are one of the most common. I asked Chris Bodin of Guild Mortgage what loan underwriters care about when they analyze the health of a condo and its HOA.
Monthly Maintenance Fees/Delinquencies
If 15 percent of homeowners in a condominium are late in paying their monthly dues for 30 days or more, the complex can be ruled ineligible for financing. This softening of payments indicates a shortage of funds from mortgage holders and is usually the first indication that a unit might be going into foreclosure. Lack of paying owners also affects the condo association’s ability to make repairs and maintain the grounds, which results in an unkempt appearance for the building that depreciates the value of all the units.
Ten percent of a community’s association fees must be set aside in a special “reserves” escrow account. These reserves are held for excessive, non-routine maintenance, such as a pool pump breaking down, pathways that need repairing, or other “out of the ordinary” maintenance costs. Fannie Mae must see the accounts of the community in order for a prospective buyer to qualify for a loan.
Fannie Mae requires that 50 percent of the units be occupied by owners. This gives stability to the community and assures other owners that their community won’t be renter-dominated. It’s incumbent on each community association to monitor who’s purchasing units and what the intention is for occupying them.
Fannie Mae looks at the list of owners to rule out that no more than 10 percent of the units belong to investors. It was generally the investors who walked away from their condominium mortgages, which exacerbated the downturn in the condominium market. Fannie Mae looks for stability through the owner-occupiers of a condominium community.
New Building Sales
Fannie Mae passed one of the most stringent new regulations in 2009. This regulation requires that 70 percent of the units in a newly constructed building be pre-sold in order for Fannie Mae to consider lending on the final 30 percent. Prior to 2009, the baseline was 51 percent.