In June of 2018, Fannie Mae announced significant changes to their guidelines regarding the review of condos. The government-backed company will now allow a limited review for the purchase or refinance of a condo unit if the borrower can bring a 25% down payment.
25% is certainly a large down payment, but this remains an enormous shift in Fannie Mae’s policy, and it could create tremendous opportunities for buyers looking to purchase investment condos. Because of the refinancing option, it’s also great news for people who already own condominiums, either for themselves or as financial investments.
Limited Review Condo Investment Properties
This shift in policy creates significant opportunities for investors and buyers of condos who are interested in or currently own condos in a complex that has more than 50% of the units designated as investment properties. Before this shift, a condo facility with more than 50% of the units as investments were considered “unwarrantable,” meaning they do not meet the lending criteria established by Fannie Mae or Freddie Mac, and could therefore not be supported or purchased by either of these companies.
Investors seeking loans in complexes with over 50% investments units were subject to unconventional lending options. This often resulted in higher interest rates compared to loans that were able to be purchased by Fannie Mae or Freddie Mac. In many situations, buyers of these units had to go with adjustable-rate mortgages, which have their own set of risks.
The changes that were announced in June of 2018 now allow any investor who is purchasing a condo, as well as buyers who want to refinance, to acquire property in units with over 50% investments and still use loans supported by Fannie Mae and Freddie Mac. Buyers will, however, need a 25% down payment. Despite the rather large down-payment requirement, they can now complete the purchase with a limited review, which significantly accelerates the overall approval process.
Why Do Lenders Care About the Percentage of Condo Investment Properties?
Another important factor for this change is the percentages of investment properties compared to owner-occupancies in a condo facility. Many investors purchase condo units as an investment; they can either rent them out as a typical rental property or sell them if they feel there is a chance for profit. On the other hand, many people simply purchase a condo as their personal home, or at the very least as a second home, perhaps in a coastal vacation area.
Lenders, traditionally, have wanted to see that a facility has a high rate of owner-occupants and less investors. This is because high rates of investor ownership, and lower rates of primary owners, indicates that the investor could have trouble selling the property. If the investor can’t sell the property, he or she may have difficulty paying back the lender. This is why low percentages of owner-occupants have been seen as a risk to lenders.
In the past, buyers purchasing units in buildings with less that 50% owner-occupancy were unable to get financing supported by Fannie Mae and Freddie Mac. Now, however, this requirement is lifted for certain loans, creating a windfall of opportunity for motivated investors.
Understanding Limited Reviews vs Full Reviews
Full reviews can take time to complete, so it’s an investor’s best advantage to use a limited review whenever possible. According to Fannie Mae’s guidelines, when a full review is required, lenders will have to look at a wide range of information, including the HOA projected budget to make sure it includes allocations for specific items and provides funding of replacement reserves. Also among the many requirements, lenders will need to make sure the unit has proper reserves and must calculate these under a specific process. They will need to confirm the budget includes utility payments, and must check to see that the project is located on “contiguous parcels” and that the structures within the facility are “within a reasonable distance from each other.”
The list of requirements for a full review goes on and on, but with a limited review, the lender only needs to verify three different items. First, he or she will need to verify that the project meets the requirements of condo units and applicable standards. Next, they will need to make sure it’s not an ineligible project, such as a timeshare or a facility with mandatory membership fees. Finally, the lender will simply need to verify that the project does not include manufactured housing. Once you verify these three simple requirements, you are all set to start the next phase of mortgage approval!
Why Loan-to-Value Matters to Lenders
One of the main issues that concerns lenders, and one that is important for this report, is loan-to-value ratio (LTV), which is directly impacted by a down payment. As we noted above, the requirements for this change include a 25% down payment or larger, which means that the loan must have an LTV of 75% or less. Loan-to-value ratio is essentially a statement of the size of the loan compared to the overall value of the property. If, for example, a condo is worth $200,000, and the buyer has a down payment of $100,000 and borrows $100,000, the LTV would be 50%. (50% covered by the loan, 50% covered by the down payment.)
The lower the LTV, the more likely you are to be approved for the loan. Statistically speaking, when LTV ratios go over 90 or 95%, for example, the chances of mortgage default are enhanced. A requirement of 75% or less is actually quite strict compared to many other lending options, but it still makes many condo units available to lenders who can support this initial investment.
Accurate Support for Your Condo Investment Questions
If you want more information on financing for investment-condo purchases, contact the expert team at San Diego Purchase Loans. We’ll help you understand the requirements for financing a condo so you can make a wise investment in your financial future!
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