Condo Loan Craziness
Just because you have good credit, low debt-to-income ratios and a good size down payment, don’t think that qualifying for a purchase mortgage on a condominium will be a breeze. It may not be you that the Federal National Mortgage Association (FNMA) is concerned about. Since FNMA is the likely buyer of the mortgage advanced by your lender, they are fastidious about how the condo homeowners association (HOA) or property management company is managing the affairs of the building.
There are some rules you should know before making an offer:
- If you intend the condo to be an investment property, over 50% of the units in the building must be owner-occupied.
WHY? Owner Occupants look after their units and are less apt to default on their mortgages - If the building offers in-room housekeeping and concierge services, FNMA will assume the condo is operated as a hotel and your loan will be declined.
WHY? Short-term rentals (daily/weekly/monthly) are prohibited – whether offered by the HOA or the unit owners (and if the latter, the HOA will need to police this use)
It is not easy for the HOA to monitor the number of rental units – in which case the appraiser will need to make what is often an unreliable estimate. If this estimate is high, it triggers a red flag in the eyes of the lender. Letters of explanation and verbal confirmations will be required, thereby causing substantial delays and increasing the odds that your loan may not close.
Here’s the Point: Need a loan to buy a condo unit? If the building offers short-term rentals, chances are you won’t get your loan.
Free Money at the Closing Table
Free? I think not! But there are definitely “lender credits” available to you, depending on the interest rate you select. The technical term for this credit is “yield spread premium”. But is the 
lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan? This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.
The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs. In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio. The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.
Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score. After following a program of credit card debt reduction, his FICO score increased from 599 to 642. This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.
Here’s the Point: The next time you get an interest rate quote from a lender, be sure to ask them how you can increase the “credit” to which you may be entitled to apply against your closing costs.
