Today’s Condo Mortgages

How An Association’s Financial Stability Can Make or Break the Deal…

By Clayton Wallace

The economic downturn of 2008 was a game changer for potential buyers of a condo. The downturn, which was brought on, at least in part, by the availability of exotic mortgages to some with less than stellar credit, caused the nation’s largest backer of residential mortgages, the Federal National Mortgage Association – known widely as Fannie Mae – to toughen up many of its requirements for potential condo owners.

Sherry Weaver is a mortgage specialist at National Bank of Commerce in Gulf Shores and is widely considered by her peers and area real estate agents to be the leading expert on obtaining a condo mortgage along the gulf coast. She said obtaining a Fannie Mae backed mortgage today is much more difficult than it was just a few years ago.

“Contrary to what many people have heard, we can still get Fannie Mae backed mortgages,” Weaver said. “However, as opposed to the ease of obtaining a mortgage a few years ago, on a scale of one to10, with 10 being the hardest, I’d say it is an eight or a nine to get a mortgage today.” Gone are the days of easy 100 percent financing, and the fiscal solvency of not just the mortgage applicant – but condo associations as well – is under intense scrutiny, according to Weaver.

“If a mortgage applicant has at least a 25 percent down payment, I can get away with doing a cursory or ‘limited review’ of the condo association’s finances,” she said. “If the applicant doesn’t have 25 percent to put down, I have to do a full review. Some of the associations may not pass a full review of their finances.”

She said many real estate agents are now putting a rider in their contracts that state the purchase is contingent upon the association passing the required review. “That’s not entirely a bad thing,” she said. “I think people buying a condo should know the financial status of the association before they buy into the complex.”

According to Weaver, one of Fannie Mae’s requirements is that an association must allocate at least 10 percent of the budget to reserve funds. “I have to look for a line item in their budget showing they have the requisite reserves,” she said.

Somewhat surprisingly, she said regardless of the Fannie Mae requirement, some condo associations do not put the required funds back, and prefer to assess owners if an emergency arises and extra funds are needed. “I have to look at the books of every condo down here every year to see which ones are complying with the requirement,” Weaver said. “This is important because if you can’t get Fannie Mae financing in a complex, it isn’t really viable.” She said not being an approved association greatly curtails an owner’s ability to sell a unit.

Weaver said one of the first questions mortgage applicants and real estate agents ask her is whether a particular complex passes muster with Fannie Mae. “I tell them that I won’t know until I’m able to look at their most recent budget,” she said. “A complex may be fine one year, but not the next. They are truly all over the place. Some associations have much more than the required amount in reserve. Others just prefer to assess owners.”

Another issue many complexes along the gulf coast have had with Fannie Mae is that the lending giant will not issue mortgages any longer on what they call “condotels.” Although they will still offer mortgages on condos that will be put in rental programs, there are some guidelines that must be followed, according to Weaver. “There can’t be a registration or rental desk in the lobby. It would be hard to operate a hotel without a rental desk in the lobby, but a condo should be able to operate fine without one,” she said. “A second item Fannie Mae looks at is whether a complex allows single-night rentals. Fannie Mae requires that an association allow nothing less than three-night rentals.”

Weaver said there are three primary items pertaining to condo associations applicants should provide to their mortgage professional that will make the application process run smoothly. “The first thing is a current association budget that shows either 10 percent of the budget has been put back in reserves, or in the alternative, a study showing they have more than 10 percent in reserves already,” Weaver said.

The second item, according to Weaver, is a certificate showing the association is insured adequately. “I need certificates showing adequate coverage with both regular insurance and flood insurance policies,” she said. “Fannie Mae requires flood insurance policies cover 100 percent of the complex’s value, even though FEMA only requires 80 percent coverage. I can’t close a loan unless they’re at 100 percent.”

The third item Weaver said she needs is a certificate showing the association has fidelity insurance in place. “This is a policy that protects the association in case an employee or board member absconds with association funds,” she said.

She said condo owners should familiarize themselves with the basics of the Fannie Mae requirements, and check into their association’s finances to see if these requirements are met. “Owners should bring this up at their next association meeting. They should talk about the budget reserves. They should talk about the flood insurance and they should talk about the fidelity insurance,” she said. “If they do that, it will go a long way towards making their projects marketable through Fannie Mae.”

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