All About CONDO financing - lending guidlines and what condo project are approved by fha & fannie mae - If you're looking at purchasing a condo in Myrtle Beach this is a must read!!
Condominium Financing Solutions
January 11, 2010
Jake Lee
Realtor, CREN
843-240-0431
www.SCRealEstatePartners.com
Table of Contents
1. Introduction- Where are we and how did we get here?
2. Fannie Mae and Freddie Mac’s condo-tel guidelines
3. Currently approved projects
4. How to get a project approved
5. Famous FNMA 921 form
6. Available programs
7. FHA condo loans
8. Suggestions for improvements going forward
Introduction
Where are we and how did we get here?
The condominium market in the Myrtle Beach area has gone through some dramatic changes over the last several years. We went through a feeling of almost anything goes. We are starting to bump up against a feeling of almost nothing goes. The changes have always seemed to happen gradually, but in the last month or so we have seen a very rapid shift towards much more conservative underwriting of condo loans.
The root of these changes begins with the ocean front condo market. For many years, Fannie Mae and Freddie Mac did a poor job of distinguishing between condo-tels and condominiums. They were accepting everything sent their way as a condominium. This lack of clarity and oversight gave them a portfolio of loans that was heavily weighted with condo-tels even though they technically did not accept them. When the market began to slow and foreclosures began to pop up, Fannie and Freddie began to realize that they had a problem. They gradually gave clearer guidance to lenders about the types of properties that they would or would not accept. This caused lending guidelines to get stricter, until we had the complete elimination of condo-tels qualifying for conventional financing.
If the story ended there, we would have been able to understand what types of properties we could and could not finance. In the last month or so it seems that everything has changed again. Fannie and Freddie have told lenders that they will not purchase loans on condominiums that have any of the characteristics of a condo-tel. The guideline that is causing us the most concern is advertising of rental rates. Even if daily or weekly rentals are prohibited by the condo documents, owners are still listing units on web sites with daily or weekly rentals. That alone can disqualify a condominium project from conventional financing.
Why is this happening now? We really don’t know. However, Fannie Mae is requesting another large sum of money from the government to continue operating after continuing to lose money month after month. We have also heard a rumor that they have sent employees to various resort areas on the east coast and have been very upset at what they have found. If you look at the Fannie guidelines in the next section, you will see that the location of the project in a resort area automatically puts a condominium under closer scrutiny. In other words, every condominium in our area will be looked at closer than a condominium in a non-resort area.
In the next section, I have included the guidelines as they pertain to the determination of what is a condo-tel. One of the difficulties Lenders face is in interpreting the guidelines correctly so that they are able to sell their loans to Fannie and Freddie. They have to be able to sell the loans to continue funding loans. If too many mistakes are made, they will be out of business. This goes for all lenders. What you always find is that every lender will interpret the guidelines differently. That is why lenders sometimes give different answers to the same question.
While the guidelines are not exciting reading, they are helpful in understanding where Fannie and Freddie are going. I will also be using them in the last section to highlight the direction that I feel we will all need to go in the future. Anything in red is something that I feel you should look at closely.
Identification of Condominium or Cooperative Hotels
Fannie Mae will not purchase or securitize loans that are secured by individual units in projects that are operated as a commercial hotel or motel.
Fannie Mae frequently receives questions from lenders on how they can identify a condominium or cooperative hotel. The lender must perform a careful analysis of the project to determine the project’s eligibility. Lenders have several sources of information on which they can rely. These include, but are not limited to, the appraisal, the contract for sale, and the Internet. Fannie Mae considers projects with any of the following characteristics to be hotel-type projects and therefore, ineligible:
1. Central telephone system
2. Room service
3. Units that do not contain full-sized kitchen appliances
4. Daily cleaning service
5. Advertising of rental rates
6. Registration service
7. Restrictions on interior decorating
8. Franchise agreements
9. Central key systems
10. Location of the project in a resort area
11. Owner-occupancy density: The project may have few or even no owner occupants
12. Projects converted from a hotel or motel
Lenders must thoroughly examine the appraisal and contract of sale to determine if there are guaranteed rent-backs, references to rental pooling or management agreements, and SEC filing references and/or prospectus documents.
The Internet has become a common source for project and unit-specific information. The applicable project’s Web site may contain information on the project type, amenities, and availability of units for rent.
This is Freddie Mac’s definition:
Condominium Hotel
A Condominium Hotel is a Condominium Project in which any unit owner or the Homeowners Association is a party to a revenue-sharing agreement with either the developer or another third-party entity. Mortgages secured by units in a Condominium Hotel are not eligible for sale to Freddie Mac. Freddie Mac's determination that a project is a Condominium Hotel is conclusive.
The definition is quite vague. It does go on for several pages and give slightly more detail but in reality, Freddie Mac will make the determination and there is no recourse if they decide that the property is a condo-tel. Are you starting to see why lenders are becoming very careful when looking at any condominium? One of the sites that is causing problems is VRBO.com. I am not being critical of the site or what it does because it has found a need and is filling it. You can visit the site and pull up Myrtle Beach to see how many units are being offered as rentals. This is what an underwriter will do.
So far, I have tried to present the situation as it is today. With all of that said, lenders ( Like my preferred lender, Mike Hogue) are still in the business of making condominium loans. In the next sections, I will review some available conventional financing options along with some non-conventional options. I will also list condo projects in our area which are already approved for conventional financing and explain how to get project approval for both new and existing condominium projects.
Eligible projects in the Myrtle Beach area
In doing research for this presentation, I have found that my preferred lender, Mike Hogue, has access to several lists of eligible condominium projects. These lists are compiled by Fannie Mae, HUD (FHA) and various other conventional lenders. They all have one thing in common. They all contain some type of disclaimer basically saying that the list is subject to change at any time and that ultimately it is the lender’s responsibility to insure that the loan is saleable. Something else to remember is that many times only part of a project gets approved. Just because a project is on the list, it does not mean that every building and phase in the project is approved. I wanted to include this list to show that there are still options available for conventional financing.
Indian Wells Golf Villas
Jasmine Lake Condominium
Villas on the Green
Sea Gardens Condominium
Wyngate Condominiums
Egret Run
Kiskadee Park
Bay Meadows Condominiums
Colony Club
Courtyard Homes at Cascade
Garden Creek Condominium
Hawthorne Condominiums
Heatherstone II
Shorewood Condominiums
Wellington at Palmetto Point
Windsor Green Condominium
Wynbrooke Condominium
Landings at River Club Condominium
Lauderdale Bay Condominium
Park West Condominium
608 63rd Ave
Arcadian Lakes
Carolina Keyes
Chateau by the Sea Condo
Cypress Bend
Edgewater
Ironwood at Barefoot Resorts
River Oaks Golf and Tennis Villas
Seven Oaks
Shadow Moss
South Bay Lakes II
Southbridge I
Southbridge Villas III
Summer Times
Sweetwater
Teal Lake Village Condo
Tidewater Ridge
Tupelo Bay Golf Resorts
Waterway Village at River Oaks
Wedgewood Condo
If you have or are interested in listing your condo with me (Jake Lee ( www.SCRealEstatePartners.com )) or are working with me to purchase a condo.. my prefered lender, Mike Hogue at First Home Mortgage 843-685-2465, would be happy to do the research for you and let you know what options are available for a particular condo project. If you would like to email him the project name and address, his email address is:
MHogue@gofirsthome.com
Condominium Project Approval
The best way to insure that financing will be available for a condominium is to apply for project approval. Fannie Mae has recently revived project approvals after a 2 year hiatus. FHA has had a spot approval program for years that is now slated to disappear shortly. The deadline has been extended to February 1 and we are hoping it will be extended again. I will talk more about FHA loans later.
Once a project has Fannie Mae approval, a lender is assured that the loans done there will be saleable. Unfortunately, the process is arduous and expensive so that it is normally only done by a builder during the construction process. That is why it is not uncommon for a project to be partially approved. Once a builder has met certain requirements in the earlier phases, conventional financing may become available for later phases without Fannie Mae approval.
Your lender will normally handle the process for you. In order to submit an application, your lender will need recorded condo documents, bylaws, budget, insurance, FNMA 921 and an appraisal. My preferred lender, Mike Hogue with First Home Mortgage, contracts with an outside company whose only business is Fannie Mae approvals. The cost can be paid by the builder, realtor, lender or some combination. If you are a builder interested in the process, Mike Hogue and I would be happy to meet with you.
Famous Fannie Mae 921 Form
CONDOMINIUMHomeowner’s Association Certification | |
|
|
|
|
|
|
| |
|
Date: |
|
Loan #: |
|
|
Seller Contact Name & Phone: | |
|
Project Name & Address: |
| |
|
Applicant(s): |
| |
|
|
| |
|
|
| |
| 1. | Have all units, common elements, and/or facilities been completed? | Yes No | |
| 2. | Is the project subject to further expansion? If yes, # of additional units to be built: ___ | Yes No | |
| 3. | Is the project a conversion of an existing building? If yes, year converted: ____ | Yes No | |
| 4. | Date control of the HOA transferred from developer to unit owners: |
| |
| 5. | Total number of units in project: |
| |
| 6. | Number of units sold and closed: |
| |
| 7. | Number of units under contract: |
| |
| 8. | Number of units rented: |
| |
| 9. | Are there multiple sales to one investor: If yes, list breakdown: | Yes No | |
| 10. | How many units are over 30 day’s delinquent? |
| |
| 11. | Are there any pending special assessments? If yes, explain: | Yes No | |
| 12. | Is the HOA involved in any litigation? If yes, explain: | Yes No | |
| 13. | Are there any adverse environmental factors affecting the whole project or as individual units? | Yes No | |
| 14. | Does the owner’s association have a reserve fund separate from the operating account? If yes, is it adequate to prevent deferred maintenance? Current amount in fund: $ |
Yes No | |
| 15. | Total income budgeted for the year: | $ | |
|
| Total reserves budgeted for the year: | $ | |
| 16. | Do the project legal documents include restrictions on sale, which would limit the free transfer-ability of title? (e.g. Age Restriction, First Right of Refusal, low to moderate income restrictions) |
Yes No | |
| 17. | Is the unit part of a legally established condominium project, in which common areas are owned jointly by unit owners? |
Yes No | |
| 18. | Are the units and/or common areas owned in fee simple or leasehold? |
| |
| 19. | Can units be rented on a daily basis? If yes, how many years has this been permitted? | Yes No | |
| 20. | Is there any on-site rental desk? | Yes No | |
| 21. | Are daily maid/cleaning services offered and/or are there any on-site restaurant/food services? | Yes No | |
| 22. | Is project subject to timeshare ownership or mandatory rental pools? | Yes No | |
| 23. | Is any part of the project used for commercial purposes? If yes, what percentage of square footage? | Yes No | |
|
|
|
| |
| INSURANCE: |
| Yes No |
| 24. | Who is named insured on HOA’s master insurance policy? |
| |
| 25. | Are common elements/limited common elements insured to 100% replacement cost? | Yes No | |
| 26. | Coverage $____________ Deductible: $_______________ Expiration Date: _____________ | Yes No | |
| 27. | Are units or common improvements located in a flood zone? | Yes No | |
|
| Or, is the coverage the maximum available per federal flood program? | Yes No | |
|
| If yes, is flood insurance in force? | Yes No | |
|
| Does this cover 100% replacement? | Yes No | |
| 28. | Is the HOA insured for General Liability? If yes, amount $_________________ |
| |
| 29. | Is the HOA INSURED for Fidelity Bond? If yes, amount $___________ | |
| 30. | Minimum number of days required for written notification to be given to HOA or insurance trustee before any substantial changes to project coverage can be made or before project coverage can be canceled: | |
|
I hereby certify that the information represented on this form is true and correct to the best of my knowledge. | |
|
|
|
|
|
| |
| Signature |
| Homeowner Association Representative’s Title |
| Phone | |
|
|
|
|
| FHMC 5/1/01 | |
| | | | | | | | | | | | | | | | | | | |
Available Programs
There are three basic types of financing. The most common is conventional/conforming. The second most common is FHA, which I will talk about in the next section. The third type of financing and one that we are starting to rely on more and more is non-conforming. Non-conforming loans are just what they sound like. They do not conform to agency guidelines and are done by portfolio lenders. Portfolio lenders can make their own rules so are able to lend on properties and to individuals that would not normally qualify for financing.
You may have noticed that many lenders are pushing for condo buyers to put 25% down on second home condominium purchases. The reason is that Fannie Mae offers a limited project review when there is a down payment of at least 25%. Lenders have been able to avoid a lot of the problems involved in distinguishing between a condo and a condo-tel with a limited project review. This is an area that I am finding is becoming more and more difficult for lenders. Does a limited review take away liability for a lender? My feeling is that very shortly, the limited review process will not be allowed to eliminate the need for a lender to go into a deeper review of every condominium to determine if it fails any of the condo-tel tests. In plain language, if there are any web sites offering daily rentals for any condos in the project, the loan will be rejected.
That brings me to portfolio lenders. We have been very fortunate in finding a lender who loans on the borrower rather than the property. Their criteria is very strict but we are using them more and more to finance condos and condo-tels. There may be other lenders locally who still finance condo-tels on a case by case basis. The only way to find out is to ask your lender, as well as your local expert Realtor Jake Lee how they are obtaining financing for their condos and condo-tels.
FHA Condo Loans
There have been some changes to the entire process of getting an FHA condominium approval. There are also changes to the type of financing you can do within an FHA approved condominium project. Most of the changes took effect on December 7, 2009. There is some good news and some bad news coming with the changes.
The good news is that the project approval process has been streamlined. The documentation list is very reasonable and the cost to obtain approval should be minimal. There have also been some temporary changes in the guidelines to reflect current market conditions. The bad news is that FHA spot loans in unapproved condo projects will be eliminated as of February 1, 2010.
Since Myrtle Beach has a large concentration of second homes, you may feel that the FHA changes are immaterial since FHA loans are only for primary residences. Historically, Fannie Mae would accept condominium loans in projects with FHA approval. We have just been informed that as of February 1, 2010, Fannie Mae will not accept an FHA project approval. That is the sum total of what we have from Fannie Mae.
Suggestions for Improvements Going Forward
I would love to end this by saying that this will all end shortly and soon it will be back to business as usual. I do not believe that will be the case. After years in the Real Estate Business buying and selling homes and condos, I have seen the guideline pendulum swing back and forth repeatedly between too lenient and too strict. This time will be no exception. Eventually the guidelines will begin to allow more leeway. Until then, I will give my opinion of what we can do to lessen the effect of the guideline changes.
When a lender is looking at a condominium to determine whether or not it is eligible for conventional financing, one of the first places they look is Google. Many times we are finding that individual unit owners are offering their units for nightly rentals, even if this is in violation of the condo bylaws. In most instances, conventional financing will not be allowed. My first suggestion is to push homeowners associations and management companies to do the exact same search that lenders do and insist that those sites be removed from the internet. This will have an immediate and positive effect on the condominium market.
If you are interested in purchasing a home, condo, or townhouse along the South Carolina Coast including Myrtle Beach, Pawleys Island, Murrells Inlet, ETC be sure to call me (Jake Lee 843-240-0431) or visit me on the web at www.SCRealEstatePartners.com . If you have any questions about these condo regulations please call me or my preferred lender, Mike Hogue 843-685-2465 at any time.
We look forward to working with you and assisting you in the purchase of your new home or investment in Myrtle Beach