A lot of surge in current Bay Area real estate market is being driven by First Time HomeBuyers. Some sources estimate that they now account for 50% of the market. A lot of First Time HomeBuyers end up buying condominiums since it fits into their budget. In this market of low property prices, you may be able to buy a condo for almost the same mortgage payment as the rent that you are paying. However, in last few months Fannie Mae & Freddie Mac have implemented lot of new guidelines for condos which will make getting a mortgage very tough. Lets look at some of them:
Higher Interest Rate/Cost - There is now a .75% pricing adjustment for all loans >75% LTV secured by a condominium. So as the first time homebuyer either you will pay this in form of paying extra points or taking a higher interest rate to offset the cost. Mortgages on condos with LTV's <75% will not be impacted. So if you have downpayment less than 25% and you plan to buy a Condo, budget for higher interest rates or closing costs.
Delinquent HOA Dues/Pending Litigation - Fannie Mae & Freddie Mac would not allow any loans where more than 15% of the attached condominium units are 30 days or more delinquent on their HOA dues. Also note that if there are any pending litigations against the HOA, it's not eligible for a conventional loan.
"Walls-in" coverage policy required - Earlier, if the Home Owner's Association (HOA) dues covered the Hazard insurance you didn't have to worry about buying additional insurance. Not anymore! The new guidelines ask for "Walls-in" coverage (Also known as HO-6 policy). As the name suggests, this covers wall-to-wall insurance inside your house. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit's appraised value.
Owner-Occupancy Ratio Requirements - Fannie Mae requires that established condominium projects consisting of attached units have an owner-occupancy ratio of at least 51 percent at the time the loan is originated (purchase or refinance) if the mortgage loan being delivered is secured by an investment property. Established projects where borrowers will occupy the unit or use the unit as a second home are not subject to any owner-occupancy ratios.
FHA to the rescue - FHA has still not implemented some of these guidelines and could be your only source of mortgage should you plan to buy a condominium for Primary Residence. FHA has no pricing/interest rate hits for loans above 75%. They also allow HOA dues delinquency >15% and so far "Walls-in" coverage is not required.
However, note that some lenders have specific investor guidelines which supersede that of FHA. If you are a First Time HomeBuyer or an Investor looking to buy a Condominium feel free to contact me to see if you can secure a mortgage against the property.
Mortgage Broker/Banker | San Jose, CA
(408) 615-0655 | Shashank@ArcusLending.com
Ranked among Top 150 Loan Officers and Top 40 under 40 Most Influential Mortgage Professionals in the Country