Condo prices are reaching record lows in some parts of the country, but getting financed for a condo loan or refinancing an existing loan can be problematic. Even if you qualify or the loan and have good credit, you may run into some problems when signing that loan contract and may not be aware of an increase in homeowner’s association fees and other caveats until the last minute.
Whether you’re planning on purchasing a new condo or are thinking of refinancing a loan this year, make sure you ask your lender these all-important questions:
Will the bank consider the area a “declining market”?
If the answer is yes, it may be much harder to get a mortgage loan for a condominium. Banks may not extend attractive loans in areas where they think the value of the condo is expected to drop dramatically. Consider other options if the bank decides you are choosing a property in a declining market.
Is the building approved for FHA loans?
Ask the condominium manager if the building has been approved for FHA loans. If the answer is “no”, you will need to ask the lender if that particular unit meets Fannie Mae and Freddie Mac guidelines. Fannie Mae’s requirements require that more than half of the condo units are already owner-occupied, that a single owner doesn’t own more than 10 percent of the units, and that all amenities must be completed if the development is under a year old – among other requirements. If the condominium property doesn’t meet these requirements, it may be difficult to get your loan approved and your options could be limited in that particular area or neighborhood.
Will the condo association run into any legal or financial problems?
If the condo association files for bankruptcy because too many units end up in foreclosure, or they are poorly managed and end up having legal problems, you may end up paying a dear price. Even if you pay cash for your condo and have complete ownership of your unit, you are still vulnerable to the effects of a poorly-run homeowner’s association. Check the association’s track record and find ways to determine if many of the units are already in foreclosure. You do have the right to ask about the financial records of the condo association. If a large percentage of owners aren’t paying their fees or there is no plan in place for managing expenses associated with expansions or improvements, you could be setting yourself up for financial trouble.
What are the restrictions and limitations associated with the unit?
From parking rules to neighborhood and grounds access, you need to make sure you fully understand what types of restrictions and limitations you are subject to as a condo owner. The condo unit is governed by a declaration and certain rules listed in the title documents. You can review these documents on your own, or have a buyer’s agent go over them with you so that you know exactly what to expect.
What is the occupancy rate?
The recession has made many condo owners have to rent out their properties in order to avoid foreclosure. Make sure you have an accurate estimate of what the occupancy rate of the complex is. If it is very low, you may not be investing in a property that can bring you a high return on your investment in the long run.
Buying or refinancing a condo during tough economic times has both pros and cons, but you have to be aware of some common pitfalls related to condo ownership. Make sure you have answers to the questions above before proceeding with your loan application.