Condo Financing Red Flags (with Max Leaman)

Condo financing can be complex, and certain red flags can make or break a deal for buyers and sellers. Understanding these potential hurdles early in the process can help you guide your clients toward a smooth transaction. Based on insights from Max Leaman, a leading mortgage expert specializing in condo financing, this guide outlines key red flags to watch for and how to navigate them effectively.

A detailed write up is below the video!

Red Flags in Condo Financing

Litigation Issues

• One of the first things to check is whether the condo project is involved in litigation.
• Not all litigation is problematic, but construction defect litigation is a major red flag.
• Key questions to ask:
  • What is the nature of the lawsuit?
  • How much will it cost to repair?
  • Have repairs already been made?
• If repairs are complete and the lawsuit is purely financial, financing may still be possible. However, if the repairs have not been made, conventional financing is unlikely.

Owner Occupancy Ratios

• Many lenders require a minimum of 51% of the units to be owner-occupied for traditional financing.
• This rule can vary based on loan type and down payment:
  • A higher down payment can offset lower owner-occupancy ratios.
  • Some investors may still obtain financing even in projects with low owner-occupancy rates.

Single Entity Ownership

• If one person, group, or company owns too many units in a condo project, it can raise red flags.
• Guidelines vary:
  • Fannie Mae and Freddie Mac generally limit single entity ownership to 20-25% of the units.
• This is especially important for new construction or condo conversions, where a developer may still own a large portion of the project.

Commercial Space Limits

• If the condo project includes too much commercial space, it can disqualify it from traditional financing.
• Fannie Mae and Freddie Mac typically allow up to 35% commercial space in a condo development.
• If a condo building has ground-floor retail or a significant commercial presence, it may require alternative financing.

Non-Warrantable Condo Status

• Many agents assume that if a condo is non-warrantable, it’s not financeable—this is not true.
• Alternative financing is available, but terms may differ:
  • Higher down payments
  • Slightly higher interest rates
• The key is to understand why the condo is non-warrantable and what financing options are available.

Condo Conversions and New Construction Risks

• If a condo was recently converted from apartments or a hotel, it may face extra financing challenges.
• If the project has been converted within the past year and is not at least 50% sold to owner-occupants, financing will be difficult.

VA and FHA Approval Considerations

• VA and FHA loans have specific condo approval lists, which can be checked on their websites.
• If a condo is not on the FHA list, it may still qualify through a single-unit approval process.
• VA does not allow single-unit approvals, but projects can be submitted for approval, often within 1-2 weeks.

Listing Agent Perspective

How to Prepare for a Smooth Transaction

1. Gather Key Documents from the HOA Upfront
   • Budget (shows financial health of the HOA)
   • Insurance policies
   • Fidelity insurance (for projects with 21+ units)

   • Litigation status

     Have the Seller Obtain These Documents Instead of the Lender

   • HOAs often charge lenders $50-$500 for these documents.
   • Sellers, as HOA members, can obtain them for free.
   • Disclose the Condo's Status Clearly

Buyer Agent Perspective

What to Look for Before Making an Offer

1. Ask the Listing Agent for Key Documents
   • Budget, insurance policies, litigation status

   • Fidelity insurance (for projects with 21+ units)

     Use the Option Period Wisely

   • Since HOAs charge for key documents, some buyers hesitate to go under contract without knowing if financing will work.

   • Instead, use the option period to gather information and determine if financing terms are favorable.

     Understand Property Approval in the Contract

   • If financing is denied after the option period, the buyer may still be protected under the third-party financing addendum, which allows them to terminate and get their earnest money back.

The best advice for any buyer, buyer’s agent, seller, or listing agent is to work with a lender who specializes in condo financing. Condo guidelines are constantly changing, and many loans that other lenders claim “can’t be done” actually can be financed.

Key questions to ask a lender before working with them:

1. How many condo loans have you closed in the past 12 months?
2. Have you worked with non-warrantable condos before?
3. Do you have experience with condo conversions and new developments?

By proactively addressing these financing red flags and working with experienced lenders, agents can help their clients avoid unnecessary delays and surprises in condo transactions.