Mortgage options vary just like the number of home types available for purchase. A buyer’s choices for financing of a condo, however, can be, well, complicated.
In Seattle, getting a mortgage on a home at Madison Tower is different than, say, Insignia Towers, and just as it’s different when buying new construction at KODA (opening soon) versus Nexus (open for more than a year now). In the complex world of condominiums, it is as important to know which buildings are favorable for financing as it is to ensure a buyer’s eligibility for the mortgage itself.
When eyeing a condo purchase, a buyer should first start by interviewing a lender (or several) to understand the applicant’s qualifications and test the loan officer’s ability to apply his/her skills and resources on the variety (or limited number) of options available for a condo mortgage. The more lenders interviewed, the better the odds of finding the right fit for the buyer.
Taking a step back, for the purposes of this blog post, I am defining a “condo” as a traditional mid- or high-rise structure in King County that has shared ownership. I am not placing certain others in this bucket, such as gated single-family homes or townhome communities, co-ops or manufactured-home parks that can also be categorized as condos.
Ownership of the condo home typically includes all space within a defined set of walls (known as “walls in” ownership), including partitions, fixtures, and, usually, shutters, windows, balconies and/or patios connected to the unit. The owner also has shared responsibility for the upkeep of common elements such as the lobby, hallways, and perhaps amenities. (Condo bylaws, covenants and other legal documents usually lay out in specific terms who is responsible for what.)
Getting a mortgage is complicated for several reasons. The loan underwriter working with the financial institution offering the mortgage will want to research and confirm certain details about the building and weigh the risk of loaning a hefty sum to the prospective borrower.
The underwriter follows established “guard rails” set by Fannie Mae, Freddie Mac and the banks to limit their exposure. When that risk is too high – either against the building or borrower – the application is denied.
For example, most underwriters refuse to provide a mortgage to applicants wishing to live in a condo where most occupants are renters (like an apartment environment). Belltown Court is a 249-unit condo community with indoor pool. Rentals on all homes – even short-term (like Airbnb) – are allowed and, at last check, only 35% of the units were owner-occupied.
The 47-home Madison Tower sits atop the Loews Hotel 1000 in downtown Seattle. Most underwriters find that to be a risky proposition because homeowners do not necessarily have control over the long-term use from their hotel owners below. (For example, what if a pandemic hit and closed many hotels for a year or more? Forget it; that would never happen!)
In these two examples, a specialty bank that offers portfolio loans and keeps them on their books is the best – and sometimes only – source for a mortgage. Washington Federal (you know, WaFd) is the king of such loans in our area but mortgage rates can be 1%-2% (or more) higher. Most other banks sell off the mortgage to others – such as Fannie, Freddie or investors – to clear their ledger and sell more loans.
As for a project where the developer is selling new-construction units, Fannie will only back mortgages if at least 50% of the homes have been conveyed (under contract) to principal residences or a limited number of second-home purchasers.
As you can see, there are layers of scrutiny when seeking financing on a condo purchase. Working with a real estate broker/condo specialist and an experienced lender will help untangle the rules and regs for a qualified buyer.
Undoubtedly, condos are under the microscope from underwriter teams seeking to ensure a building is in good financial shape. These sharp-eyed scrutinizers review:
- the number of delinquency payments of Homeowners Association dues (most lenders require at least 85% of owners’ dues are paid on time; delinquencies typically start at 60 days’ late);
- if there are lawsuits pending against the HOA and its associates (lenders shy away from buildings facing potential losses from legal proceedings);
- the condition of title on the building as well as the unit itself (a title can include liens that would need to be explained – and in most cases resolved – to approve a buyer’s mortgage); and,
- proof of adequate insurance coverage on the building, known as a “master policy” that includes the common areas.
If any one of these issues cannot be resolved, most lenders will turn down the mortgage request. Deeming the condo “non-warrantable,” lenders will punt or, at best, offer a loan at 2%-3% (or more) above conventional (warrantable condo) loans.
Conventional loans on established places like Insignia or Emerald in Seattle are typically insured by government entities or deep-pocketed investors and run 15, 20 or 30 years. New construction loans are available through both traditional lenders and financial institutions working directly with the building developer.
Even a traditional loan comes at a premium – Fannie tacks on 0.75% on a 30-year loan on a condo, for example – because of the underlying risk to occupants sharing ownership in a building. The basic rule still applies: The larger the down payment, the lower the interest rate to buyers and, in the case of condos, a down payment of more than 10% will likely require less scrutiny – a limited questionnaire vs. full questionnaire sought by underwriters. (A good lender will tell just how big a deal that could become!) Buyers typically pay for the HOA-completed questionnaire – around $200 – at closing. Another premium – roughly 1.25% – can apply to condo purchases targeted as an investment property rather than owner-occupied.
To cast a wider net for buyers, some HOAs work with the Federal Housing Administration and Veterans Administration to seek their endorsement as an FHA- or VA-approved condo. This requires the HOA board to complete an application for review by underwriters.
Unofficially, there are 168 Seattle condos that have the VA’s blessing. In the heart of the city, VA loans are generally accepted for homes listed at: Bellora, Belltown Court, Braeburn, Brix, Decatur, Elektra, Escala, Gallery, Klee, Luma, Marselle, Parc-Belltown, Pomeroy, Plaza del Sol, Trace North, Trio and Veer Lofts (as of March 2021). Additional rules apply.
FHA loans can sometimes be a good fit for first-time buyers seeking a condo. These loans allow borrowers to finance homes with down payments as low as 3.5% and interest rates determined by the individual’s financial circumstances. (FHA loans, though, include insurance fees higher than conventional loans and typically offer the least favorable terms among all options.)
Like the VA, FHA loans will only be accepted on its approved condo list. Of the 88 Seattle condos unofficially approved by the FHA, only six are in downtown/Belltown/Denny Triangle (Arbor Place Tower, Cosmopolitan, Harbour Heights, Klee, Mosler Lofts and Seattle Heights).
Even without FHA/VA approval, a lender representing a buyer will work with an HOA to conduct a “single-unit review” (previously known as “spot approval”). This process can take about 3-4 weeks to receive a response (though sellers may not wish to wait that long) and cost $750 to the HOA, but an approval can apply to the full building for 3 years.
Among the main qualifications for all condo loans is that the building be at least 50% owner occupied, have no special assessments against its owners (that could impact the financial stability of the HOA) and commercial space of no more than 25%. Failing any of these key criteria can land the application in the rejection file.
There are other limitations and variables – seemingly changing every few months. The information here is merely a guide on what to expect and advice for buyers to be patient when searching for a good home in the right building.
—————————-
My thanks to the mortgage loan team at Salmon Bay Community Lending in Seattle for providing insights and guidance in support of this blog post.