As you have learned, not only do the borrowers go through an exhaustive vetting process prior to mortgage loan approval, but the property has to meet lender requirements and go through an approval process as well. For single-family homes this process is pretty simple.
If a borrower needs to factor in rental income to qualify when purchasing a multi-family home, the appraiser must verify current market rents as a piece of the appraisal process. The appraiser must verify that the use of the property is "legal," meaning that it is zoned and taxed as a multifamily property.
Condominium properties require a more exhaustive investigation.
Although some of the condominium property requirements may appear arbitrary, the rules exist to protect both the borrower and the lender. Rules are different for small properties (two to four units) versus large properties; there are different rules for new construction and new conversions and the rules can change with jumbo versus conventional financing.
I will not get into the specific rules here but will cover the general areas that are reviewed for condo approval.
· Owner occupancy: Lenders want a high level of owner occupancy in all condo associations. Owner occupants are considered more likely to maintain their property, pay all fees on time, and manage assessments or fee increases if required. Statistically, investor owners will stop paying their fees and even the mortgage if their personal finances get snarled, which can weaken a condo association.
· One owner with a high percentage of ownership: One unit owner cannot own more than 10% of the total units. For the reasons outlined above, if one unit owner owns a high percentage of units and fall upon hard financial times, the entire association can be at financial risk if that owner stops paying their condo fees.
· Adequate insurance coverage: Condo fees include the insurance coverage for the entire condominium structure. "Walls In" coverage has recently been added into the insurance requirements for condo units. Many master policies cover to the walls of the condo unit and borrowers traditionally would get a more standard policy to cover fixtures and personal contents. Today if "Walls In" coverage is not provided by the master policy the buyer may be required to get a small amount of additional coverage.
There are some other insurance requirements. Our experience tells us that most associations are adequately insured; it is the "Walls In" requirement that comes back to us on some loans.
· Reserve Funds/budget concerns/litigation: Today condominium associations are required to have 10% of their annual budget going into a reserve account; this must be a line item on the actual budget.
Additionally the lender needs to verify that all condo fees are collected and up to date, no more than 15% of the total units can be past due on their condo fees.
We are required to verify that there are no pending law suits against the association that are not covered by the master insurance policy or any other issues that could negatively impact the condominium finances.
· Commercial use: Any commercial use cannot exceed 20% of the entire square footage of the subject property.