How to Get a Mortgage on a Condo in Litigation

How to Get a Mortgage on a Condo in Litigation

For many people, condominiums are a wonderful choice for homeownership. Some people may not need the large space, expansive yard, and multiple stories of a full-size family home. Instead, two or three rooms, one and a half bathrooms, and an open living room-kitchen area is more than enough.

Life in a condo means no yard work, easier upkeep, and, depending on the facility, on-site features like fitness rooms, swimming areas, and lounges. Although anyone can enjoy a condo, they are especially popular among retirees, young professionals, and single people. However, even large families can enjoy the benefits of living in a condo.

In most cases, financing a condo is more or less the same as financing a traditional home. Lenders evaluate factors like credit scores, down payments, and debt-to-income ratio, just like they would for family homes.

However, there is a common situation that can hold up financing on condos: litigation. If, for whatever reason, a condo unit or entire facility is locked up in legal matters, it can make lenders less enthusiastic about lending on that property

Financing a Condo Unit in Litigation: Is it Impossible?

Why Do Condos Go Through Litigation?

Condominiums can go through legal disputes for any number of reasons, but it is often tied to building and remodeling projects that need to be approved by the homeowner’s association, or “HOA.” The HOA is essentially the facility’s governing body. It may be led by certain members, such as elected presidents and board members, but it is comprised of all the people who live in the building.

Because condo units have specific rules set by the HOA for remodeling and building, it’s not uncommon for potential or ongoing projects to become tied up in litigation, pending approval by the HOA or completion by a contractor.

Here’s a couple examples of what might happen…

Let’s say the building unit needed a new roof, so the HOA hired a contractor to complete the job. The contractor completed the job, but there was an issue with the billing. The contractor thought they would be paid in lump sum, but the HOA insist on installment payments. The contractor then sues for the full amount, and the entire facility becomes tied up in litigation.

Another example could be defects in the building. In some cases, you can have a facility that has been operating perfectly for years, with buying and selling done every month. Then a defect around the premise is discovered, and the HOA decides to sue the original builder to force them into fixing the issue. Once again, the facility is tied up in litigation.

What Does this Have to do With Financing?

Unfortunately, many lenders simply won’t loan money towards the purchase of a condo unit that is currently tied up or can expect litigation in the future. To understand why, you have to look at the issue from the perspective of a lender and take into consideration the ever-important debt-to-income ratio.

Quick Explanation: Debt-to-Income Ratio

Debt-to-income ratio tells lenders the amount of money someone owes compared to the amount they make, usually calculated on a monthly basis. If someone owes $1,000 a month and makes $4,000 a month, their debt-to-income ratio is 25%. (1,000 = 25% of 4,000.)

Now, back to the condo in question…

Litigation costs money. There are legal fees, lawyer dues, and other costs associated with any legal procedures, even if it never goes to court. These costs will be paid by people living in the condo unit, which means the cost of living in the unit could increase, which in turn would increase someone’s debt-to-income ratio. Until the legal matter is settled and a lender knows exactly how much living in the facility will cost, they are far less likely to approve financing.

Here’s an example of how it might play out:

You are looking to purchase a condo unit through the use of a mortgage. You apply for credit and get pre-approved by the lender, although your debt-to-income ratio with the mortgage would be 45%, a little higher than they prefer. However, the lender, when further researching the unit, learns that the HOA has filed a lawsuit against a contractor, claiming HVAC work performed last month was insufficient. Until the lawsuit is settled, every owner in the unit will have to pay $250 a month for legal costs. This $250 might seem small, but it pushes the borrowers potential debt-to-income ratio to 48%. That’s just enough for the lender to feel too much risk and pull approval.

How to Get Financing for the Purchase of a Condo in Litigation

We can help you get financing for a condo that is currently in litigation, but you should be aware that the process may take longer than normal. However, when you work with our professional team we can assist with the review and increase your chances of affordable financing.

When financing a condo that is in litigation, it will need to go through a review, which occurs in one of two ways. There is a limited review, which requires less information from the HOA than a full review. Generally, a limited review will ask about ten questions, including questions about the litigation. A full review can have as many as 50 different questions for the HOA, as well as information requests on the facility’s budget, balance sheet, and insurance coverage.

If a condo is going through litigation, we will review the project budget sheet, as well as the balance. To approve, no more than 15% of the owners in the building can be delinquent on dues owed to the HOA. There are also specifics regarding payments to insurance, and at least 10% of the annual income must be in a reserve account.

Getting Affordable Financing on a Litigation Condo is Possible

There are other requirements, but the bottom line is this: a condo in litigation is NOT off limits. If you have a decent credit score, a low debt-to-income ratio, and a strong credit history, our team can help you apply for financing and increase your chances of securing a mortgage on the condo.

Even if you feel your credit history is less than stellar, contact us today and we’ll work with you to ensure the best possible chance of affordable homeownership.

Testimonials

“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”

“Chad and his team got me funded in less than 30 days, completing a deal that another broker fumbled around with for almost 90 days. Effective, efficient and excellent communication skills. Outstanding professionalism.”

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We just closed on our second transaction with the Chad Baker team. They are very well organized and I can attest that they are looking out for their clients’ best needs. A special shout-out for Juliann B. who was our guide through the painful loan process. We found Juliann to be very responsive, kind, patient, and diligent in getting both our refis closed well.”

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I hope you enjoyed reading this article. It's my goal to keep you updated with the latest real estate mortgage news. I'm proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for LendUS. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2017. Got a question for Chad? Call (858) 353-8331 or submit your question online