When the financial world began to capsize in 2006 (with the Richmond VA Condo market 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 every loan. Condominiums, with the added layer of underwriting, felt this more acutely than single family.
What do you mean by ‘added layer of underwriting’?
The major difference between lending on a single family home and on a condo, besides some small pricing adjustments, 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 located in. This underwriting requirement of the Condominium HOA, in lending vernacular, is called determining “WARRANTABILITY.”
Here is what you need to know…if a Richmond VA condo is considered WARRANTABLE, Fannie Mae, Freddie Mac and FHA are willing to make loans in the building (this is a simplified version of the definition of WARRANTABLE…the forms required to submit to FHA for approval is 97 pages long). If a project is not WARRANTABLE, then Fannie/Freddie/FHA are not willing to lend and buyers are forced to pay cash or secure other forms of debt at higher rates with far less favorable terms. It is more expensive to finance a condo which is not WARRANTABLE and dramatically impacts market value. (A list of condos in Richmond that are trouble can be found here…)
Richmond VA Condos are judged by the following criteria to determine ‘Warrantability’:
- 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 here is that some of these factors are fixed and some are fixable. As an example, a project with 50% commercial density will probably never be a WARRANTABLE project while a project that is 49% sold is likely to soon be WARRANTABLE. While neither condo with these conditions are considered WARRANTABLE, one has a lot easier path to WARRANTABILITY than the other.
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. Not all Richmond VA Condos are created equally and understanding what makes them different is key.