In certain parts of the country, especially in bigger cities, condominiums are extremely common. In the past several years condo financing has became a lot more complicated since, unlike a house (where a lender is only concerned with a clean title), condominiums must meet very strict guidelines for a bank to approve a mortgage. These guidelines have to do with the financial stability of the condo association, the ratio of owner-occupied vs. investor-occupied units, any legal issues that the condo is involved with, and any other concerns.
It would be next to impossible to get a bank to approve a condo before a purchase agreement has been signed. Typically the bank will send a questionnaire to the condo management company in order to get all the necessary information. This questionnaire, along with the appraisal, will determine whether the bank will approve the condo.
Some red flags to look for during this process:
– If the condominium is a new construction or a new conversion and very few units have been sold.
– If there is a high percentage of commercial space (shops on the first floor, commercial parking garage, etc).
– If a lot of units are rented out but not occupied by their owners.
Mortgage underwriters will also review the insurance policy that covers the condo in question. This policy, called Master Insurance, covers the structure against various hazards such as fire, flood, earthquakes, hurricanes, etc. Master insurance also includes liability coverage, boiler/machinery coverage, employee dishonesty coverage.
Unlike a single-family home, condo ownership typically means owning the dwelling but not the land that it’s on. If it is a multi story building you would then own the air rights equal to the volume of your condo.You would also be responsible for a share of the bill for maintaining the common elements of the condo, such as the grounds, pool, club-house, condominium structure itself, etc. Your share is determined by the ratio of your unit’s living space to the total space in the condominium. The amount of money required to adequately maintain the building is determined by the annual budget which is voted on by condominium owners. Annual budgets should also allow for adequate reserve funds in case of emergency repairs. Mortgage underwriter will study this budget and check what percentage of existing condo owners are behind on their monthly maintenance fees and if sufficient funds are being held in reserves.
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