Issuing title insurance on a condo is really no different than insuring a single-family home. However, differences do exist in how the units are defined as well as the requirements financial companies have to meet in lending on “warrantable” as well as “nonwarrantable” condos.
The owner of a single-family home, of course, owns the lot as well as any improvements that have been made. In contrast, a condo buyer receives title to the airspace within or inside the common walls, ceiling and floors of a particular unit. Common areas, for example, are the pool and spa, exercise room and parking, which each condo owner owns in part and enjoys as part of the community lifestyle.
Numerous lending options
Condominium buyers have many lending options: Conventional Fannie Mae or Freddie Mac, government FHA (Federal Housing Authority) and VA (Veterans Administration) and other nontraditional loans. The Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac, and the Federal National Mortgage Association (FNMA), also known as Fannie Mae, are public government-sponsored enterprises (GSEs) that provide a secondary mortgage market for new-home lending.
These loans stipulate unique requirements that must be satisfied or confirmed before lending in a particular community, said Jeff Williamson, mortgage professional/condominium specialist for Homeowners Financial Group, Scottsdale.
To “warrant” or not to “warrant”…
Often a condominium community is referred to as “warrantable” or “nonwarrantable,” referring to whether the project adheres to Fannie/Freddie, FHA, VA or other guidelines.
“When buying a condominium, the lender is not only verifying a borrower’s creditworthiness, his or her ability to repay and financial health, they are also underwriting the financial health of the condominium project itself,” Williamson said.
Among the general questions: Are the homeowners’ association (HOA) fees being collected in a timely manner? Are reserves sufficient? Is the HOA or community a party in any litigation? If so, what type of litigation?
Specifically, these requirements mandate that at least 50 percent of the units are owner-occupied (new construction can vary and is dependent upon legal phasing); fewer than 15 percent of the units are in arrears in association dues; the HOA is not named in any lawsuits; commercial space accounts for 25 percent or less of the total building square-footage; and no single entity owns more than 10 percent of the project units.
“If the project does not meet warrantable guidelines, there are other nontraditional or niche programs available for buyers seeking financing in one of these projects,” Williamson said. “Typically, the interest rate might be slightly higher than regular financing and the down-payment requirement will likely be higher than the Fannie Mae minimum of five percent down. It really comes down to what is causing the project to be nonwarrantable.”
His company encourages condo developers to meet with him or an associate before finalizing any legal phasing documents and Covenants, Conditions and Restrictions (CC&Rs). “We want to make sure that we are setting the project up to be successful upfront and that all documents are drafted in accordance to Fannie Mae guidelines,” he said.
If the project isn’t warrantable, a potential condo-buyer needs to find out why the project is not considered warrantable by the GSEs, FHA or VA. Make sure, for instance, that you understand what the condo/homeowners’ association fees fund.
“Buying in a project that is nonwarrantable isn’t necessarily a bad thing. Remember, the lender has an interest in making sure the project is sound,” Williamson said. “However, we see projects that were once nonwarrantable become warrantable. This is common in new construction as the project continues to meet required sales percentages.”