When someone submits a loan application, the lender begins the process of evaluating credit, income, assets, employment and other facets of the individual’s financial profile. Lenders need to determine whether or not the applicant can afford the new monthly mortgage payment, one of the most important jobs a lender performs. Affordability means not just comfortably making the mortgage payment each month, which includes a monthly allotment for property taxes and insurance, but also additional monthly obligations such as a car payment, student loans or even day care.
Lenders are also tasked with validating a responsible credit history and do so by ordering a credit report and requesting credit scores. Some mortgage programs require a minimum credit score while others give the lender a bit of leeway and allow the lender to set its own minimum credit scores as long as the lender’s minimum isn’t lower than the program minimum. There will be three scores provided, one each from the three main credit repositories, Experian, Equifax and TransUnion. Even though each uses the very same algorithm developed by the FICO Company, due to various payment reporting dates and subscriptions, the scores will rarely be the same. Similar, but not the same.
For instance, a lender requests credit scores and is almost instantaneously provided with three, 742, 749 and 720. Lenders will ignore the lowest and the highest and use the middle score. If there are two or more people on the same application, the lender uses the lowest middle score for qualifying.
Two years of consistent employment will also be verified both with a verification letter sent to the applicant’s employer as well being provided copies of the last two years of W2 forms. Copies of the most recent pay check stubs covering a 30 day period will be reviewed to validate gross monthly income. If someone is self-employed, that person can be expected to provide the last two years of federal income tax returns. Bank statements are needed to make sure the applicant has enough cash available for a down payment, closing costs and cash reserves.
But what many don’t realize is that the lender, while approving the applicant, must also approve the property under contract. And when that property is a condominium, there are a few more steps the lender must take. And when that condominium is also a condotel or otherwise what is considered a “non-warrantable” condo.
What is a Condominium?
Condominiums are a type of real estate where the individual unit owner owns the interior space of the condo unit while equally sharing ownership of the common areas with the other owners. Common areas are things such as walkways, workout facilities, landscaping and sidewalks, for example. Maintenance of these common areas is performed by the project manager who is then managed by the Homeowner’s Association.
When someone writes a contract on a condominium, the same two-stage approval is performed. First the borrower must obtain an approval and next the condominium. Financing a single family residence means the lender makes sure the property is in good condition and is considered marketable. A property is considered marketable if there have been sales of similar properties, typically three or more, that have sold within the past year. With a condo, the very same sort of review takes place. But condos, in order to receive the most favorable rates and terms, at least according to Fannie Mae and Freddie Mac, must also run through a series of tests that provide the lender with information about the project as a whole. If the condo passes the test, the condo is considered “warrantable.” Among other requirements, a condominium project must follow the following:
The homeowners association will receive a questionnaire from the lender asking these questions and a few more and if the project passes all the tests the project is warrantable and the loan can be sold in the secondary market. But what happens when a condominium project is non-warrantable? How can someone finance a non-warrantable condo?
Financing is available for non-warrantable condos, just not loans that are considered to conform to Fannie or Freddie guidelines, or the project has not been previously approved by the FHA or the VA. If someone applies for a loan to finance a condo and the lender says it can’t fund the loan because the condo is non-warrantable, the buyer needs to look for another lender.
Non-warrantable mortgage loans are available in various loan terms, down payments and interest rate options. While interest rates for non-warrantable condominiums will be a bit higher compared to those offered for warrantable condos but not really by much. If you’ve got a non-warrantable condo in mind and you’ve already been preapproved let’s talk about the project to first make sure it is non-warrantable. That means sending a questionnaire to the homeowner’s association and seeing what comes back. If the project might be non-warrantable because of pending litigation, we can find out the nature of the litigation and proceed with a non-warrantable loan. If for example, the homeowners association files a suit against a plumber due to work performed on a hot water heater, that’s really a minor issue and can often be ignored and the unit financed.
When financing a non-warrantable condo that loan doesn’t have to remain there forever nor does the project have non-warrantable status forever. Developers know their units must be considered warrantable in order for their buyers to obtain financing. But sometimes that’s not going to happen right away. Buyers can always obtain financing with a non-warrantable loan and then later refinance into a conventional loan when the project finally receives warrantable status.
What is a condotel? They’re actually becoming more and more popular and can mostly be found in urban areas and resort locations. A condotel is one where owners can rent the units out on a short term basis, typically as short as just one night but because condotels can be located in a vacation spot or a retreat, owners can rent out the units for several weeks or even months.
You might not be able to tell if a project is a condotel by looking at the property from the outside but once you step inside the place looks very similar to a hotel. There is a check-in counter and common areas. There will be a restaurant or two and shopping. And just like a non-warrantable condo, a condotel can also obtain financing.
If you want to buy a unit in a condotel, let’s talk about available loan programs to achieve your goals. Let’s get you pre-approved and take a look at the property at the same time so that when you make your offer you’ll know in advance there won’t be any issues after your offer is accepted. Not every lender can make loans for a non-warrantable condo or a condotel, but we do. Call me directly and I’ll explain all the details.
“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.”