Your loan application has been processed and the loan is ready for clear to close but then an underwriter points out that everything is clear except the condominium project. There is a high delinquency rate, specifically, 26% of the total unit owners in the project are 60 days or more late paying their HOA dues! The loan is now ineligible for sale to the agencies, Fannie Mae and Freddie Mac.
What about submitting to Fannie Mae for an exception through the Credit Variance Administration System? Sometimes this works and often times it doesn’t. What about a private investor? Caliber Home Loans has a project standards department and they allow ineligible projects with the agencies to be purchased but with their restrictions. For example, Caliber will allow a delinquency rate to go up to 25% whereas the agencies only allow 15%.
However, investors such as Caliber, will request a DTI restriction of 45% on primary and secondary homes and a Loan-to-Value reduction of 5% below the maximum LTV for that loan program. If this is a purchase, this is a nightmare! The borrower would then have to bring more cash to close as a result of lowering the loan amount to meet LTV restrictions. All of this because the project was found to be ineligible before clear to close!
Thousands of Loan Officers nationwide struggle with condominiums. Many refuse to even lock a condominium because of all the work it takes to make it to closing. It is a whole other layer of inquiry that can turn a transaction upside down in seconds. In particularly, Mortgage Brokers, Retail, Wholesale, and other mortgage sales professionals have common frustrations when locking investment occupancy condominiums. I've been told, "I do not even lock condominiums any longer," "I hate condominiums," "It's not even worth the effort," Mortgage professionals are tired of the narrow path to funding a condominium project. In addition, it doesn't help if the underwriter doesn't understand agency and non-agency condominium guidelines. Here are some good steps to follow to ensure what I call a Strong Lock Condominium.
1. Confirm that the subject property is, in fact, a condominium. Why waste time on condominium guidelines when it's not a condo?
2. Ensure you know which investor the condominium is probably directed towards. (Most of the time, investors follow the GSEs for these guidelines-they may even have their own additional guidelines, examples such as Chase, BB&T, Flagstar, and Fortress)
3. Confirm the total number of units with the HOA and how many of those units are investment residences. If they do not know or do not wish to answer, ask them how many offsite mailing addresses they have.
4. Obtain as much information that you can without cost. You'd be surprised at how much information a borrower, realtor, title company, or HOA is willing and able to provide without cost. You will save time and money.
When you have an investment residence condominium, it's important to pay closer attention before locking the loan. When a Loan Officer asks, "Why wasn't this caught before I locked the loan?" or "Why are we finding this information out now instead of upfront?" (Borrowers ask the same questions) it is important to note the main reason as to why. The underwriter may or may not have specific information until later in the process.
This is why lenders use questionnaires. First, they do not know whether the project is established or new. Second, they do not know occupancy information. Third, the reason for questionnaires is to find out specific answers to specific questions. Until an underwriter has the answers, they cannot warrant the project. It is important to note that Fannie Mae nor Freddie Mac require questionnaires to be completed by lenders. Lenders use their suggested forms to ensure they have been diligent in reviewing the project. Fourth, other documentation may be required but not provided such as a budget. If you're able to obtain other documentation at no cost, you might as well, in case you need it.
In my experience, there is no perfect solution. Many things cause problems during the processing and underwriting of condominium projects long after they are locked in. The best that sales can do on condominiums, in particular, investment condominiums, is to follow some routine steps in order to mitigate as much risk as possible upfront. Because there are so many questions to ask, it is often difficult to obtain all the answers when credit, income, and other parts of the loan application take precedence over project reviews. There is much to consider!