CONDOS - The Pitfalls

Condominium financing has always been a bit more challenging than financing for single family residences. Why?

1. They are considered to be riskier than single family residences, since the HOA has much control over the property, and charges to owner, and therefore the loans carry loan-level pricing adjustments (e.g. higher interest rates)
2. The HOA has to go through a separate approval process. This is more rigorous for investment (rental) condos vs. the review for owner-occupied condos.
3. Master Insurance policies must meet guidelines for coverage and also include a Fidelity Bond (WHAT?) that covers the HOA from losses due to embezzlement or misuse of funds.
4. There are limitations on the number of rental proprieties in the complex that vary depending on the loan type, and whether the property is to be owner occupied or a rental. This can be problematic in coastal or resort areas where rentals are common. (think Mammoth or ski communities)
5. There can be no litigation against, or on the part of the HOA, with certain exceptions. If an attorney opinion letter states that the litigation is essentially a "nuisance" lawsuit, or that damages are easily covered by the insurance for the project, it MAY be acceptable.
6. There are specific reserve requirements that must be met. If there are inadequate reserves, the HOA is not acceptable.
7. A separate "walls-in" insurance policy is usually required for the owner; called an "H06" policy, this insurance covers not only the contents of the home but also interior improvements and upgrades. Most Master policies do not include Walls-in coverage with upgrades.
8. FHA loans, including Reverse loans, require that the project be HUD approved.
9. VA loans require that the project be VA approved.
10. Some conventional lenders also have lists of approved and disapproved condos.

The bottom line is, make sure you do your homework before making an offer to purchase a condo. Please call me to help with questions and/or searches for approved condos.