When you buy a condo, you pledge your apartment to the lending bank as security for the loan. That makes sense—but it means, from the bank’s point of view, that they not only need to check you out (by looking at your job, tax returns, and credit history) but that they also need to check out your condo building.
Unfortunately, whether you’re optimistic about the housing market or not, bank standards for condos just got tighter. Most lenders follow Fannie Mae/Freddie Mac guidelines, which have gotten tougher in recent weeks. Be especially sure to double-check if you’re buying in Florida or New York, two states where there were recent condo-building booms.
Here are the guidelines that your target building needs to hit:
For one thing, the banks want to make sure that condo buildings are full of owners rather than renters. Lynnley Browning of the New York Times notes that your condo building needs to be at least 70% sold (up from a requirement of 51% last year), with at least half the units occupied by owners, not renters. The theory is that someone who is living in a condo as their home is less likely to default on the mortgage than someone who is simply acting as a landlord. No more than 10% of the units can be owned by any one investor.
At least 85% of the units in the condo must be up-to-date on their maintenance payments, often referred to as “common charge” payments. (Note that a “late payment” is considered 30 days or more.)
Condo associations must set aside 10% of their budgets for maintenance and reserves. This is the toughest provision, as some condo boards prefer not to keep funds set aside. (As one board member said to me, “I’d rather levy a special assessment if there’s an extraordinary problem and we need a new roof. With our condo board, if it’s in reserves, we spend it.”)
How do you know if your building has been approved? Every mortgage bank keeps lists. If you live in a building where there hasn’t been a sale in a while, check the latest financials to see if the reserve number is a potential stumbling block. If you then want to go ahead with your purchase, your mortgage broker or banker should be able to help move the paperwork along.