Mortgage savvy: Warrantable or non-warrantable (condos) — that is the question

The following *great* explanation of this frequent issue in condo purchasing comes courtesy of Jono Sexton of Blue Hills Bank… it covers what banks look for in a condo, in what situations the guidelines matter most, and what can be done in the worst case scenarios.

When financing a condominium, as a bank we hope we can use a LIMITED PROJECT REVIEW (aka ‘limited’, or , ‘LPR’) for the condo approval. That means that most of the normal condo guidelines do not apply. LPR is only possible if an attached condominium unit is being purchased by an owner occupant with 10% down or more, (5% down if the unit is detached), or, as a second home with 25% or more down. Investment purchases are always subject to a FULL REVIEW.

Eight areas of importance, in a FULL REVIEW (5 or more units):

1) At least 50% of the units must be owner occupied. 2) In a 20 unit association (or larger), nobody may own more than 10% of the units. In a 5-19 unit association, nobody may own more than 2 units. 3) The budget must contribute 10% (or more) of the total annual condo fee income to a reserve account. Focus on the condo fee income only (not laundry income…). 4) The reserve account must have 10% of the annual condo fee income in it. 5) No more than 15% of the unit owners may be over 60 days delinquent on condo fees. 6) Maximum commercial space is 25% of total GLA. 7) No lawsuits against the association. Unless, it can be determined what the possible financial exposure is, and if there is sufficient insurance or reserves to cover that exposure. 8) There must be at least $1.0 million of liability coverage. Depending on the size of the association, it must also have Fidelity Bond Coverage equal to 3 months of condo fees (over 20 units).

2-4 Unit associations:

1) 1 out of 2, 2 out of 3 and 3 out of 4 units must be owner occupied. 2) Nobody can own more than 1 unit. 3) No budget required. 4) Same commercial space rules. 5) No lawsuits. Same analysis applies. There are other areas of concern, but in and of themselves, they are not necessarily fatal (i.e. Allowing units to be leased for less than 30 days/yr).

If a unit is ‘non-warrantable’, it may still be financed, but it will require a portfolio loan. Banks can do them more easily than correspondent lenders, who must submit them to their ‘investors’ for approval. I used to hate this the most-the wait. Some lenders will only use portfolio loans for owner occupied non-warrantable condos, and some will only offer ARMs. Generally speaking, even with portfolio lenders, the most fatal issues are lawsuits, weak budgets that do not reflect any sort of oversight, and a significant concentration of ownership by one entity. But, always ask. I also find that even with PMI, in some instances, we are able to finance these units. It is safer if it is 20% down, but, they can be done. As a bank we are able to get many things done with PMI companies that non bank lenders cannot.

Jonathan Sexton – Vice President NMLS # 41145 Blue Hills Bank 186 Concord Ave Cambridge MA 02138 617-922-4088 (cell) JSexton@bluehillsbank.com

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