Below is a guest blog written by Mark Anderson from Pulaski Bank. Recently I have run into some issues helping buyers finance the purchase of condo. I asked Mark to explain what the difference is so that people can be more prepared when making an offer.
Approval for a mortgage goes beyond assessing the credit risks of potential borrowers. Mortgage financing, unlike credit cards and student loans, is based on physical collateral in the form of houses and condos. This may seem elementary, but it is crucial for understanding the problems we currently face when financing condos.
For a house, an appraisal based on recent comparable sales in the same area is the only evaluation needed to prove the value of collateral. For condos, an appraisal is not enough as a condo is part of a larger building. The building itself is managed by a home owner’s association, or HOA for short. For a mortgage bank to approve your loan on a condo, it must evaluate the covenants and budget of the HOA along with the makeup of the owners and their ability to pay monthly dues and assessments.
This evaluation process has become much more strict over the past 2 years, but not without reason. Consider the common, real life cases of HOA’s that cannot afford to make necessary repairs because members are behind on their dues. In many cases HOA’s like this don’t have a general reserve fund at all. If banks only evaluated you as an individual, they simply wouldn’t be assessing the risks related to the collateral as a whole.
The good news with banks tightening guidelines is that buyers approved for loans on condos can count on the fact that their new HOA is well organized and that the members keep the place well funded. It can be frustrating hearing from your loan officer that you cannot buy a particular unit, but it’s important to keep the bigger picture in mind. What may seem like a silly technicality affecting your ability to buy a condo is ultimately based on how well that condo is going to maintain its quality and value.
Here are couple of good questions to ask when doing on research on particular condo.
- Is the building managed by a professional management company?
- Can I obtain a copy of the condo association board meeting minutes?
- How large are the HOA’s reserve funds?
- Have the condo fees increased in recent years?
- Is it possible to find out the delinquency rates of present owners to see if they are paying their association dues on time?