When the real estate bubble burst, so too, did the dreams of many speculators who were snatching up and flipping condos like hotcakes. Today, buying a condo can still be a great choice but getting financing for it could be a bit more challenging because some financial institutions are "blacklisting" some condo complexes due to high speculator ownership and dropping prices.
According to a recent Marketplace report by Dan Grech, government-backed Fannie Mae and other banks in states such as Michigan, California, Florida, and Nevada are refusing to lend to credit-worthy potential buyers who are interested in purchasing condos in certain complexes that may have either high speculator ownership or freefalling prices.
"If no one can get financing, no one can buy the available units; eventually those units go into foreclosure. When multiple units go into foreclosure, homeowner's association fees aren't being paid, so the common areas don't get kept up. The cable gets cut off, the electricity gets cut off. It's a spiral that goes out of control," said Jeremy Resnick in the recent report. He's the owner of UpsideDownFlorida.com. Numerous companies like Resnick's are popping up to help homeowners handle their properties when they owe more than the homes are worth.
So is buying a condo still a good idea? It can be, but you have to understand that whether you are buying or trying to refinance your condo, lending restrictions have become stricter for these types of projects.
Today, condo owners are forced to share more than just common walls and common grounds; their financial situations are being jointly considered when it comes to loans. Now, mortgage lenders are looking at the entire makeup of the complex before determining if money will be loaned or a unit can be refinanced. The lenders are looking to see how many condos have gone into foreclosure, how many are owned by speculators, and if the residents are keeping up on their Homeowner Association dues.
All of this amounts to more challenges to buy condos—making what is often an entry-level purchase even more difficult for buyers. Some loans require larger down payments and have higher fees associated with them. Fannie Mae will guarantee mortgages for condos where 70 percent of the units in a condo complex are presold. That's up from the previous requirement of 51 percent. However, some exemptions to the requirement have been made.
The reason for stricter lending practices, especially with newly built condos, is because of the high level of condo foreclosures which then drives the prices of condos down, and weakens the condo association budget for the complex. Lenders say this makes writing loans for condos more risky.
Here's a look from Fannie Mae at its three new specific characteristics that make a condo project ineligible.
- New projects where the seller is offering sale/financing structures in excess of Fannie Mae's eligibility policies for individual mortgage loans. These excessive structures include, but shall not be limited to, builder/developer contributions, sales concessions, HOA or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement.
- Projects where more than 20 percent of the total space is used for non-residential purposes.
- Projects where a single entity (the same individual, investor group, partnership, or corporation) owns more than 10 percent of the total units in the project.
Knowing the new restrictions doesn't have to keep you locked out of the condo market. Instead, having the knowledge should help you to narrow your search for homes to the areas where you are certain you can buy.