Latest from the Mortgage Blog
Conventional Financing for Condos
At first glance, one may think, "is there really a difference between a condo and a townhouse?" The answer is yes -- when it comes to obtaining a mortgage on the property, the difference is tremendous. Determining if the property is a condo or a townhome, comes down to the legal description for the property; it's a bit complicated because sometimes a project is called "ABC Townhomes", but the legal description tells us it's really a condo. The determining factor will always be the legal description; for example, a townhome (or detached home) have a legal description that includes the words "Lot ?? and Block ???" , while a condo's legal description includes something like "??? Condominiums, unit ??". Your Realtor and I can help determine this for you.
CONDOS NEED TO BE WARRANTABLE
If you are purchasing a condo, the project needs to be "Warrantable" by Fannie Mae or Freddie Mac guidelines, in order for you to be able to secure financing on the property. What does it mean to be warrantable? This means that the condo complex, and the HOA meet certain guidelines created for Conventional loans. We can determine if your condo meets these guidelines by reviewing a "Condo Questionnaire" and current budget that the HOA will complete.
This questionnaire is comprised of 24 questions, per Conventional loan guidelines, that when answered by the HOA, will tell us whether the condo project is "warrantable" (i.e. you can secure financing and close) or not. Some of the most common questions on these questionnaires are the following:
• Does one person/entity own more than 10% of the units in the complex?
• What is the ratio of owner occupied vs. rented units? For example, If you are buying the condo as a rental property, it must be at least 51% owner occupied.
• Is the HOA involved in any litigation?
• Does the HOA have sufficient insurance & reserves in their budget?
• What percentage of the homeowners are 30 days or more behind on their HOA dues?
• If the condo has been recently converted or built, what percentage of the units are sold or under contract?
• If the condo has retail space in the building, what percentage does it make up of the total space?
Our goal is to have the questionnaire completed and reviewed as soon as possible; if it turns out that the condo does not meet guidelines, you can terminate the transaction before you spend any money on inspections or appraisal. Please note that some HOAs charge $50-$200 to complete these questionnaires, so that is an investment that will have to be made upfront in those cases.
MORTGAGE RATES CAN BE HIGHER FOR CONDOS
In April 2009, Fannie Mae and Freddie Mac installed new "loan level pricing adjustments" for condos. A 30 year fixed mortgage rate for a condo will be anywhere from 0.25%-0.5% higher, than it would be for non-condo property, even with great credit scores. This pricing adjustment is in effect for every borrower who is putting a down payment of less than 25% of the price.
For "Lot & Block" properties like detached homes/townhomes, none of these extra steps are required. These are the biggest differences between purchasing a condo versus a townhome/detached home, in today's market.
Probably WAY more than you wanted to know, but I hope it helps.
Is A Portfolio Lender Right For All Transactions?
I wanted to write about the benefits, and pitfalls, of a portfolio lender. At Hallmark, we do not have portfolio loan programs at this time, but from time to time, I run into loans that would fit best in a portfolio program. Over the years, I have built relationships with local lenders that have portfolio loans, and always reach out to them, if the traditional route does not work. My number one goal is making sure the deal gets done, even if I can’t do the loan.
What is a portfolio lender?
Portfolio lenders are banks that lend their own money, and keep and service the loans after closing. For this reason, they do not worry about making sure that the loan meets Fannie/Freddie guidelines, only that the loan meets their internal guidelines. Portfolio lenders use significantly different underwriting techniques when reviewing the loans, and often overlook traditional underwriting hurdles that we see, like not being self-employed for 2 years, and high debt-to-income ratios – this can really make a deal happen that would be doomed in the traditional lending world.
As an example – I was working on an loan for a physician who had most recently been working in Africa the last 3 years doing missionary work, and had not filed US Tax Returns for those years. These days, that pretty much rules out a traditional mortgage. I reached out to a portfolio lender, who was able to do the loan -- no questions asked about tax returns -- once they saw the large down payment, and good credit history. This is a perfect example of the niche market that portfolio lenders can successfully serve.
There are very real drawbacks to using a portfolio lender:
1. A 20% down payment (or more) is required. A lot of clients I work with, and almost all first-time buyers, do not have a 20% down payment
2. Portfolio loans are never a 30 year fixed. These loans are typically 5/1 or 7/1 ARMs, that are only fixed for the initial terms, after which the rate will adjust. 99% of clients I spoke to over the last 5 years, have only been interested in a 30 year fixed loan.
3. Most portfolio lenders will, in addition to portfolio loans, also offer traditional Conventional financing. On traditional programs, portfolio lender’s interest rates are typically higher than the market average. So if you are looking for a traditional 30 year fixed, less than 20% down payment loan, it is not in your best interest to go straight to a portfolio lender first.
4. Portfolio lenders do not offer VA or FHA financing, which are the best loan programs for some buyers
5. Traditionally, perfect credit scores are required, so previous bankruptcies, foreclosures, collections, high credit card debt balances can often rule out a portfolio loan
In conclusion
Portfolio lenders serve a great niche in the market, but may not be the right choice for every borrower, in every situation. A home buyer will find more options and better interest rates/terms speaking to a traditional lender like me, first. After reviewing the file, if I cannot get them the best terms on a traditional loan, then I will personally reach out to a portfolio lender to see about their options. If they can help, and the buyer is ok with an ARM loan, and can come up with the large down payment, then they’ve got a deal ready to close!
Call me with any questions you may have on portfolio vs. traditional lending, I would be glad to help!