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The mortgage crisis isn’t just plaguing homeowners anymore. If you own or are looking to buy a condo, you may face serious financing difficulties in the future. In this post, we’ll explain how new changes in underwriting could affect your ability to purchase or refinance a condo.
Recent restrictions by major private mortgage insurers will make it impossible for many condo owners to get the PMI (private mortgage insurance) they need to buy or refinance a condo. For example, AIG recently announced that it will no longer write coverage for condos in hundreds of ZIP codes across the country that are designated as having “declining” conditions. This ban applies regardless of an applicant’s credit, assets, or equity stakes. Even in robust real estate markets, certain private mortgage insurers will refuse coverage on condo units that are in complexes where more than 30% of the owners are investors. Other private mortgage insurers are requiring a minimum down payment of at least 10%, regardless of how healthy the housing market is. Buyers who can manage to make at least a 20% down payment will not be affected by the new restrictions on private mortgage insurance.
Fannie Mae and Freddie Mac, two juggernaut financing sources for condominium projects, have both introduced new procedures that could reduce the availability of financing to condo buyers in upcoming months. Under these changes, the majority of the due-diligence research on condo projects’ main characteristics, such as legal documentation, the adequacy of condo association budgets, percentage of space allocated to commercial use, percentage of unit owners who are late on condo association fee payments, and percentage of units owned by investors, now have to be performed up front by loan officers. This is an incredibly expensive and time-consuming process for lenders, and investors now also expect lenders to guarantee the accuracy of their research. In other words, lenders must take full financial and legal responsibility for condo project legal documents that sometimes run into the hundreds of pages of text.
With PMI becoming less and less accessible, fewer people will have the option to buy or refinance a condo unless they can come up with a 20% down payment. Similarly, the extraordinary demands placed on lenders by investors will likely result in fewer condo loans being offered. As a result, condo financing will be increasingly difficult and costly to obtain.
