And just like that, mortgage details around financing a condominium changed again!
Last month, I dove into the “why” around “why condos are a thing” in the real estate space right now. Now, just a few weeks later, Fannie Mae & Freddie Mac have announced guideline changes again around lending standards for condominiums (condos). A bit of easing, a bit of constraint; the overall constant is change.
Let’s start with some good stuff. For my friends with Florida tides: New construction just eased up! No longer do brand-new communities need to have a comprehensive, association approval process completed for newly built, or converted, from Fannie Mae to obtain financing. The ability to determine “warrantability” (a k a, you meet guidelines) have been placed from the federal level to the induvial lending level. This is good! Fewer hoops to jump through means people get their keys faster. Also, good news: If you are financing an investment property, no longer does 50 percent of the association need to be resided in as a primary or second home. And that second part is a national standard — letting more projects adhere to their induvial allowances rather than federal in terms of occupancy standards.
On the flip side, the detail of review just got deeper. Starting in August, no longer can a lender perform a “limited review” and still close under Fannie & Freddie’s guidelines. That means more questions, documentation, interpretations, and adherence to overarching requirement than a streamline review would have presented. Biggest impact here? Reserve studies, budgets, and repair reports.
For example, starting for loan application by August 3 of this year, if the Homeowners Association (HOA) doesn’t have 10 percent of their budget in reserves, additional requirements may be imposed. And as of January 4 next year, a 15 percent threshold of reserves will be required. Calling all condo owners: That means that either you are funding the association to this level or your financing options will be reduced! Maybe that means you write extra checks now, or maybe that means resale is more limited due to options, or maybe that means your plans to drop your interest rate with a refinance have been curtailed.
Additionally, more spotlight is being shined on “critical repairs.” You may recall that in Florida, buildings collapsed from poor construction, and in California, rotted balconies gave way to morbid accidents. State regulators rallied around the need for these HOAs to be more responsible in the physical maintenance of their properties. If life safety or structural risks are found to be present on site, stabilization, remediation, and documentation will need to be present so property owners are aware of costs and lenders are aware of condition.
Whatever the case, we can look at this either from the lens of “more cost,” or the aspect of “better financial health.” As I stated last month, most Homeowners Association boards are made up of volunteer property owners that may not realize how to actually manage an entity that is created to support the fiscal, physical, and communal maintenance of the space around them. Yes, HOAs are entities, like a corporation is an entity, and as such, it is expected to function a bit more like a business than not. Will financing options continue to exist outside of these nuances? Of course! Though, remember: The more creative the financing, the more it could cost you as a consumer.
While I still see condos as being one of the primary introductions to homeownership for many folks, I do think that we are in an adjustment period. If you own a condominium, ask questions! If you are thinking about buying one, ask questions! Only by educating ourselves to our overall exposure and responsibilities can we work to continue to create sustainable, responsible homeownership in this country. Go do something nice today; the world needs it.
Austin Lampson is a licensed mortgage professional and branch manager of Origin Point Mortgage. She has spent the last quarter-century helping her clients balance math and emotion to achieve their financial goals. Reach Austin at (805) 869-7100, austin@austinlampson.com, or visit austinlampson.com.
