We cannot stress the point enough: it is imperative that clients work with a condo mortgage expert in order to navigate a sometimes difficult transaction. Condos, although they can be financed with every loan type available, have very intricate requirements that are based on the property itself and how it is managed. The Hargrave Group works with some of the top developers and condo focused agents in the area, so we start mapping out financing at square one, setting up with pre-construction sales financing. There are very few lenders who truly understand condo financing and we have a team dedicated to making them just as smooth as any other type of loan. The Hargrave Group has a Condo Department to not only work with end-users, but also help guide builders, developers, and realtors in the early stages of construction. This allows these business clients to be ahead of the game and to ensure that their property is able to obtain financing when construction is complete.
Condos present a great option for homebuyers who want the affordability and low maintenance that are sometimes difficult to obtain in the present housing market. We often see a lower price per square foot than single family homes and an abundance of new construction in the Dallas area. It is helpful to understand the condo loan financing process. Just like any other loan, there is an approval process with a down payment requirement, credit check, and full personal profile. In addition, condo loans are required to have a review of the property itself and the condo association that manages the shared amenities. Most condos require monthly or quarterly dues that go into a fund that maintains the property. This is managed by a condo association who balances a budget for the entire community. Things like shared swimming pools, parks, and structural insurance are all maintained with funds that come from monthly condo dues paid by homeowners. Our condo department will review these budgets to be sure that the funds are being used appropriately and not being mismanaged, as a requirement for obtaining a condo loan.
One more thing to determine as soon as you have identified a condo you would like to purchase is whether the condo is warrantable or non-warrantable. This is an extension of the requirements in the last paragraph but is very helpful to your loan officer in order to place you in the appropriate condo loan. A non-warrantable condo is a condominium property in which the loan is not eligible to be sold to Freddie Mac or Fannie Mae, and as such, they are considered by most banks to be more “risky.” Freddie Mac and Fannie Mae have established criteria when it comes to evaluating condominium developments. Conversely, a warrantable condo loan can be sold to Freddie Mac or Fannie Mae. Many times, the warrantability of a development is the deciding factor for many lenders, and can have a large impact on whether or not your loan will be approved. In my experience, these are the top four reasons developments are found to be non-warrantable:
- Less than 50% owner occupancy – Less than 50% of the occupants in a complex are the owners. Although not the only reason, usually these units are rentals and tenant occupied.
- 10% Ownership in a Development – If one person (or entity) owns more than 10% of a development, the complex is seen as potentially unstable. Specifically, one person has too much control over the development’s value. This would also include a development where the HOA has foreclosed on a number of properties.
- 15% delinquency – If a development has more than 15% of its owners more than 30 days delinquent at the time of inquiry, the complex is non-warrantable. Many condos “freeze” their numbers on the last day of the prior month in order to alleviate having different answers to inquiries throughout the following month (i.e. The numbers as of Jan 31 are used for the entire month of February). These delinquencies can include regular monthly/quarterly HOA fees, fines for rule violations, and non-payment of work orders.
- 10% Cap Reserve – All HOAs looking to be considered warrantable will need to have a line item in their annual budget showing that the development is depositing 10% of their annual income into a Capital Reserve fund. This fund is used for larger projects like roofs, foundation repairs, irrigation system updates, and road maintenance.
If you fall in love with a condo property that is deemed non-warrantable, don’t stress. The Hargrave Group has many condo loan options for properties that are non-warrantable.
Here are our top tips for purchasing a condo:
- Choose the right lender – All lenders aren’t created equal in the world of condo lending. Just because a bank says they finance condos doesn’t mean that they can finance the condo that you want to buy. Choose a lender that specializes in condo financing.
- Know the amenities and the cost – Condo associations govern policies, allocate expenses, and collect dues that each owner pays for insurance and maintenance. Make sure that you know the cost and what you’re getting in return.
- Select the proper insurance – Condo master policies cover the exterior of the home, but you are responsible for covering the interior contents.
- Research your building’s reputation –Like any other neighborhood of single family homes, condo communities have reputations, too. Partner with a realtor who specializes in condos, and can advise you on market desirability for each property.
- Understand configurations – Condos can have numerous floor plans within the same square footage. Consider both future plans and short-term goals when choosing a layout.
We are proud to be the preferred lender of the following Dallas condo developments: Ross Avenue - The Terrace, The Terraces at Lindell II, The Block on Bennett and The Quarter.