What Every Buyer in a Condominium Needs to Know - Condo Certifications & Financing
What Every Buyer in a Condominium Needs to Know - Condo Certifications & Financing
While your personal financial health is always the primary focus for a lender, there’s an additional factor to getting approval when purchasing a condo that most buyers aren’t aware of. The Condominium Certification (commonly called a "condo cert") provides this crucial information on the financial health of the entire condominium community. The condo cert can play a critical role in whether you're approved to purchase in a condominium complex.. Here's why:
What is a Condo Certification?
At the core of the Condo Certification process is the “Condo questionnaire.” This form is completed by the Homeowners Association (HOA) or property management company that provides the lender with detailed insight into the financial history and stability, insurability, ownership and occupancy ratios, and legal standing of the condominium association. Lenders use this information to assess risk and ensure the condominium meet certain loan requirements.
How Your Downpayment and Type of Finance Affects You
Many buyers don't realize their downpayment amount, reason for purchase, and type of finance directly impacts which type of condo review your lender requires.
- A Limited Condo Review: This review is a less burdensome for the HOA to provide and focuses on fewer risk factors, which can speed up the approval process. Lenders may allow a Limited Condo Review if the buyer is putting 10% down or more, the property will be used as a primary or second home, and it meets the defintion of an "Established Project" which means it's 100% complete, a high percentage of units are sold and held by private owners.
- A Full Condo Review: This is a comprehensive questionnaire covering finances, reserves, occupancy, structural analysis, and litigation status of the association. Lenders will require a Full Condo Review when:
- Buyer is putting less than 10% down
- The property will be used as a rental property
- The project does not meet the defintion of an "Established Project"
- FHA Loans: Regardless of downpayment, FHA loans require the condo complex to be FHA-approved. There are costs and compliance requirements for condominium complexes to be FHA-approved, and they must meet specific financial, occupancy, and structural requirements. You can check for FHA approved condos on HUD's website.
What Lenders Look For & How it Affects You
A lender is looking for key indications of financial strength and stability on the full condo review, including:
- Single Investor Ownership: If an investor or entity cannot own more than 10% of the units within condominiums with more than 20 units can be seen as concentration risk.
- Owner-Occupancy Rate: Lenders check if at least 50% of the units are occupied by owners versus renters.
- HOA Delinquency: A high delinquency rate can be a sign of financial instability. No more than 15% of the units can be more than 60 days delinquent on assessments.
- Reserve Funds: A well-managed HOA should have adequate cash reserves for major repairs and maintenance. Lenders look for a minimum reserve contribution equal to 10% of their annual budget.
- Litigation: Any pending litigation or insurance issues may pose a risk to approval.
Unlike a single-family home, a condo buyer owns the unit interior but shares responsibility for roofs, walls, parking structures, pools, gym, and other amenities with the HOA. If the HOA isn't financially stable, your lender sees risk. A poorly managed HOA could mean future special assessments or deferred maintenance that might impact property value. Even if you're fully qualified to purchase, the condo itself must also qualify.
A condo cert can make or break your deal, and can result in sunk costs for both buyers and sellers. Purchasing or selling in a condominium requires careful attention to detail and researching ahead of time. Having an experienced agent on your side can save you time, money, and stress. If you're considering a condo purchase in Las Vegas and want guidance on your next steps, reach out -- I'll help you navigate the process from start to finish!
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Thomas Grambo, REALTOR® E: Thomas@ThomasGrambo.com
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(The information provided in this blog post is for informational and education purposes only. It is not intended to be, nor should it be construed as. legal. tax. or financial advice. The content is based on general information at the time of publication and should not be used as a substitute for professional counsel. Always consult with a qualified lender, tax advisor, attorney, and/or financial professional, and visit FHA, Freddie Mac, & Fannie Mae Websites for current information and guidelines.)
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