Getting a jumbo mortgage typically involves the buyer and the bank. But when purchasing a condo, loan deals involve a third player: the condo association.
Lenders are stricter when financing condos because the homeowner isn't solely responsible for maintaining the value of the property. When someone buys a condo, they're also purchasing an ownership share in common areas ranging from the grounds to shared amenities. These are managed by the condo association, whose officers are elected by fellow residents.
Homeowners' dues go toward maintenance and upgrades, as well as premiums on a master insurance policy. Lenders want to ensure those dues sufficiently cover not only routine expenses but also any major outlays for repairs or unexpected expenses, such as a damaged roof, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. Lenders like to see reserves equal at least 10% of the annual budget, he says.
Another red flag for lenders: developments where more than 10% of units are owned by one investor, says John Walsh, chief executive of Milford, Conn.-based Total Mortgage Services. If the investor defaults on financing or monthly dues, the condo association's budget could fall apart. That investor could also sell his or her units suddenly at fire-sale prices, depressing property values of the entire development, he adds.
If a condo association has insufficient reserves, it may have to raise dues or charge residents a one-time assessment, Mr. Walsh says. This surprise financial hit could compromise borrowers' ability to pay their mortgages. Or worse, a large assessment might lead to a property value reduction.
Finally, a lender will investigate any pending litigation filed against the condo association. If it's something minor, like somebody "refusing to remove a flower pot from the window" to meet association rules, a lender may overlook it, but if it's structural damage due to poor workmanship, the lender may decline financing, says Mathew Carson, a broker with San Francisco-based First Capital Group.
To get a development's financial profile, lenders will send a questionnaire to the condo association that a representative or its maintenance company will complete. This process typically costs $100 to $300, which is paid by the home buyer, Mr. Grabel says. Alternatively, many lenders also keep lists of approved buildings for jumbo mortgages, he adds.
Maggie Visser, a real-estate agent at San Francisco-based Paragon Realty Group, hasn't had any jumbo deals fall through due to association problems, but when issues come up, her clients sometimes have had to shop around to find a willing lender, she says. She also notes that dues can vary widely, depending on the amenities offered. Dog runs, movie theaters, conference rooms and gaming rooms are among the latest trends at upscale San Francisco high-rises, she says.
Existing condo and co-op sales in May were up 3.3% from a year ago, and the median sales price was $229,600, an annual increase of 6%, according to the National Association of Realtors.
Here are more considerations for condo mortgage borrowers:
Higher interest rates. Jumbo-mortgage lenders generally follow the same underwriting guidelines used by lenders of government-backed loans, which are $417,000 or less in most parts of the country or $625,500 or less in some high-priced areas. But jumbo lenders may bend the rules a bit because they typically hold the loans on their books as an investment. If loan-qualification standards are eased, a jumbo borrower could expect to pay a higher interest rate, ranging from about a quarter of a percentage point with a bank to a full point or more with an online or nontraditional lender, Mr. Carson says. The lender may also require a five- or seven-year, adjustable-rate mortgage rather than a 30-year, fixed-rate term, he adds.
Check disclosures. Because condo developments know lenders will need to see association financials, documentation is often provided upfront to buyers before they make an offer, Ms. Visser says. If a building is already pre-approved by a lender, a buyer might feel more comfortable if a seller requires waiving the financing contingency when a sale goes into contract, she adds.
One more condo-deal breaker. Jumbo lenders also typically go by Fannie Mae rules that no more than 24% of the property can have a commercial use, Mr. Carson says.