When the world began to capsize in 2006 (with Richmond largely feeling the thud in the summer of 2008,) the world of mortgage lending changed dramatically. The pendulum that had swung as far to one side as to allow “NINJA Loans (No Income, No Job, No Assets)” now swung back the other way so far as to disallow almost any loan. Condominiums, with the added layer of underwriting, felt this more acutely than single family.
So what are the differences?
The major difference between lending on a single family home and on a condo, besides some small pricing differences, is that the approval process of a condominium requires a lender to underwrite the Homeowners Association. In a single family home, there is no requirement by the lender to underwrite anything having to do with the neighborhood that the house is in. This underwriting requirement of the HOA, in lending vernacular, is called determining “WARRANTABILITY.” Here is what you need to know…if a condo is considered WARRANTABLE, the Fannie Mae, Freddie Mac and FHA are willing to make loans in the building. If it is not WARRANTABLE, then they are not and buyers are forced to pay cash or secure other forms of debt that are at higher rates with far less favorable terms. It is more expensive and dramatically impacts market value.
The key factors that lenders use to determine a project’s WARRANTABLE status is:
- The number of sold (or under contract) units
- The amount of space in the project dedicated to commercial uses
- The number of units owned by investors
- The budget not placing enough money towards its reserve account
- The number of units controlled by 1 individual
The thing that must be noted is that some of these factors are systemic and some are fixable. A project with 50% commercial density will probably never be a WARRANTABLE project while a project that is 49% sold is soon to be WARRANTABLE.
Ultimately what all of this means is that you need to understand the reasons what a project is (or is not) WARRANTABLE and if it is (or isn’t) what can cause it to change. You, your agent and your lender all need to have a very good handle on this concept or the risks are not being quantified correctly.
