Loan programs today approve both the borrower as well as the individual property being financed. By far, the most common property purchased today is the single family home. The buyers obtain financing to acquire both the physical structure as well as the land upon which it sits. It’s a fairly straightforward process and because the single family home is the most common type of property purchased most every mortgage lender in the country provides financing for such a transaction. Another type of property that lenders provide funds for is a condominium unit, or a condo. An approval for a condo is very much like an approval for a single family home but with a slight twist. An additional twist is financing for a condotel. And one more twist is a cash out refinance for a condotel.
A condo owner legally owns 100 percent of the interior space of the unit. If there are 50 units in a condominium project, the owner has complete ownership of the inside of the individual unit. But there are other areas in a condominium project an owner does not have 100 percent ownership. What about the management office on site? Who owns that space? And what about the swimming pool and workout facility? Sidewalks? Landscaping? In a condo project owners evenly split ownership of these common areas. If there are 50 owners, then each owner has a 1/50th stake in the management office, swimming pool, workout facility, sidewalks and landscaping. Most every lender that provides financing for a single family home also has access to financing for condominiums although not every lender will have the types of loans that would finance a particular transaction.
Condo projects have to be approved separately from the unit and the borrower. When the lender orders a property appraisal the lender wants to see at least three recent sales of similar units in the project that have sold within the previous 12 months. Recent sales support the contract price on the property. But supporting the value is different than approving the condo project.
When lenders approve an individual condo they’re also required to approve the project in its entirety with a condominium review. There are two types of condo reviews, a limited review and a full review. A full review can take time and delves into the financials of the management in addition to standard review requirements. Most existing condo projects can pass the limited review requirement. The lender sends a questionnaire to the management of the condo. The review asks management to provide information such as:
How many units are there and how many are occupied by the owners? A condo cannot pass a review if more than 50% of the units are occupied by renters.
Are there any owners that are delinquent with their homeowner’s association, or HOA dues? If there are any, there cannot be more than 15% of the owners delinquent.
Are there any lawsuits that management is active with or pending? Any current or future litigation must be settled or dropped or the project cannot be approved. Minor litigation such as a slip and fall can be okay if accompanied by a letter from the association’s attorney explaining the lawsuit. A major lawsuit such as the association suing the developer is a major red flag.
Is there sufficient liability insurance? Most loan programs ask for at least a $1 million dollar liability policy in force.
There are other questions but these are the main ones that lenders need more information on.
But there is one more- are there any short term rentals allowed? A short term rental can be on a daily, weekly or monthly basis, very much like a hotel. And this is where the term “condotel” is coined. Why is this important? Traditional loan programs don’t like condos that are available for short term rentals. In such an instance the project is considered more commercial in nature and not residential. It’s a hotel. Someone can walk into the lobby of a condotel and it looks like most any hotel would look like. There’s a check-in desk and a concierge and all the other amenities one might expect when entering a hotel building. Very few lenders offer such a product but we do. And even lenders who do offer financing for a condotel don’t also offer a cash out refinance for one.
Cash Out Refinance
A refinance replaces an existing loan with a new one and a cash out refinance replaces an existing loan while putting some extra money in the owner’s pocket from the equity in the property. Or, an owner may own a condotel unit free and clear and wants to pull out equity in the form of cash. Interest rates on real estate are some of the lowest cost forms of borrowing and a cash out refinance can lower someone’s current interest rate while at the same time providing additional funds to a personal bank account.
Lending guidelines for a cash out refinance of a condotel include:
Maximum 75% loan-to-value for an owner-occupied unit and 60% if used as a rental property. This means someone that owns a condotel free and clear and the unit is appraised at $500,000, the owner can pull out as much as $375,000 with a cash out refinance. If the unit is non-owner occupied then $300,000 is available. The minimum loan amount for a cash out refinance is $100,000 and the minimum credit score for this program is 680. We will request credit scores from each of the three credit bureaus of Experian, Equifax and TransUnion. Of these three scores, we will use the middle as the qualifying score.
Cash reserves are also required at 12 months on the subject property and six months on any other real estate owed. If the mortgage payment including taxes, insurance and condo fees for the condotel unit is say $2,000 per month, 12 months of reserves equals $24,000 in a liquid account. Total monthly credit obligations including the new mortgage payment should not exceed 43 percent of the borrower’s gross monthly income. For a rental unit, rental income is allowed to help qualify using 75 percent of market rent appearing in the appraisal report. Loan programs for a cash out refinance of a condotel are adjustable rate mortgages, or ARMs in the form of a loan that can adjust once per year or a hybrid loan where the start rate is fixed for a predetermined period of time, such as three, five or seven years. The property must also be at least 500 square feet in size.
If you’re currently considering a cash out refinance on a condotel unit you own know in advance that very few lenders even offer such a program. We do and know the program inside and out. Whether you’re going to cash out to the maximum limit or perhaps just the minimum, give me a call and we can discuss your options.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email email@example.com your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email firstname.lastname@example.org.