Dennis' Mortgage Blog

Question of the week:  I’m thinking of buying a condo instead of a house, what are some of the differences in financing I need to know?

Answer:  There are several different issues that arise for condo buyers versus those looking to purchase what we label as a Single Family Residence, or SFR.  First and foremost, the Home Owners Association (HOA) will be examined as part of the approval process.  Before funding a loan the lender wants assurance the HOA is in good financial shape.  As part of the HOA examination the number of owner occupied units will also be a factor, at least 51% of the units in the complex must be owner occupied; note that units that are bank owned are not considered owner occupied and can create an occupancy issue.  As well no single owner may own more than 10% of the units in the complex.  For new developments or condo conversions this last point can create an issue since the developer or conversion owner stills holds title to the units; in this type of situation the other units need also be in escrow and the closings are coordinated to occur at the same time—or close to it.

Appraisals become a factor in condo transactions, I know they are a factor in all transactions, however in a condo transaction there are comparable sales and listings within the complex that must be used—if the complex is large enough to support that much market activity.  There are multiple challenges with condo appraisals.  First is the issue of comparable sales, underwriters will want to see comps from inside the complex, both closed sales and active listings.  If a complex has had several units go into foreclosure or through short sales they will depress the values in the complex.  Second, the data on the appraisal must match and be consistent with the information provided by the title company and the HOA—this sounds basic but it is surprising how many times we get back appraisals with data that is incorrect, more so as we are forced into the HVCC process. 

Both FHA and conventional underwriting guidelines have specific policies for condos.  First, with conventional loans there is a premium added to the pricing for all loans that have a loan to value greater the 75%; i.e. if you are putting less than 25% down then you are paying a premium for the loan compared to purchasing a single family residence.  Second, mortgage insurance companies have stopped issuing insurance in our region for loan to values greater then 90%, i.e. if you are buying a condo with conventional financing you will need at least 10% down.  As well MI companies have pushed down the debt to income ratios (DTI) that are acceptable to Fannie and Freddie on condos to 41%; i.e. if you are buying a condo with 10% down then the combined total of your new housing payment (principal, interest, taxes, insurance, HOA dues, mortgage insurance) plus your revolving debt from car payment, credit cards, etc. cannot exceed 41% of your gross income.  This DTI limit is a roll back to the underwriting standards before the use of automated underwriting by Fannie and Freddie through their web-based software engines.  In a nutshell with conforming financing: at least 10% down, if less than 20% down MI will require tighter DTI ratios, if less than 25% down there is a pricing premium.

For FHA the most basic policy is that the complex must be “Approved” or have no status with FHA—in which case what is known as a “spot approval” becomes part of the loan process.  On the HUD website is a page for checking condo approvals.  Plugging in the tract number of the condo in the “ID” section and changing the “status” to “All” brokers and buyers can see if a complex is approved, withdrawn, rejected or has no status.  If  “withdrawn” or “rejected” the complex is unable to have any new FHA financing.  If the complex is “Approved” then we can proceed with an FHA transaction.  If there is no status then we may proceed, cautiously.  For complexes that have no status with FHA there is the possibility of obtaining a “spot approval” for individual units.  As part of the processing package we must submit a complete financial package for the HOA and other documentation, the underwriter will then underwrite the complex as s/he is underwriting the borrower.  We proceed cautiously because HUD only allows 10% of the units in a complex to have spot approvals.  With the explosion in FHA mortgages the past twelve months, particularly in condo financing, many condo buyers have obtained spot approvals for FHA mortgages.  The volume has resulted in many complexes being maxed out on having any more spot approvals for FHA. 

It is important to note that many properties that appear to be condominiums are actually Planned Urban Developments, or PUDs.  PUDs are actually single family residences and as such are not subject to the same guidelines as condominiums.  There is no legal definition of a “townhome”, that is a style of architecture, but there are legal definitions for condos and PUDs that separate them due to what the owner of the unit actually owns.  In a condo the structure is owned by the HOA and the owner has a shared interest, in a PUD the owner owns the structure and has a non-shared interest in his/her unit. 

If a complex is approved an FHA mortgage on a condo is pretty much the same as on a single family residence, with the exception of the 51% or more owner occupancy.  The rate and mortgage insurance on the FHA loan is the same as on an SFR, as are the debt to income ratios and other guidelines. 

One more item to note on condos is that lenders are now requiring what is called “contents” insurance on condo transactions.  Also known as “renters’ insurance” the policy covers the interior of a condo unit against damage from fire, water, etc. and is required unless the master insurance policy of the HOA has specific coverage for each unit—which almost none do.  The purpose of the policy is to cover drywall, cabinets, counters, fixtures inside the unit that may become damaged and are the responsibility of the unit owner to repair or replace. 

Condos are great way for many individuals and families to become homeowners.  Our current market is very active with first time homebuyers and many are purchasing condos.  Because of the differences in HOA dues, owner-occupancy, down payment requirements, interest rate costs, etc. it is important that those looking to purchase a condominium or PUD unit stay in close communication with their lender and agent as they preview property and write offers to ensure when they do enter escrow they will have an efficient and smooth closing.

I will keep this link on my “Question of the Week” section to assist new homeowners:

IRS Form 5405 for First Time Buyer Tax Credit for those eligible

Have a question for me?  Ask me!   

Anyone interested in a primer on inflation and current economic conditions may wish to check out post I wrote on Wednesday at my “other” blog site title “Money”.  For those waiting for rates to drop later this year before entering the market I suggest you read this post before waiting. 

Lots of highs this week for mortgage rates, and today’s rates are actually the low for the week following a very positive trading session yesterday for Mortgage Backed Securities that continues into today.  Using my Friday Rates as a guide: 

Conforming rates have climbed four straight weeks following the low on May 15^th, today they are their highest since November 28^th—when rates were in the midst of a seven week drop that saw rates decline 1.5% during that period.  Since the 5/15/09 low conforming rates have climbed 0.75% (three-quarters of one percent); the highest four week increase since one year ago when the conforming rate went through similar climb from 5/16-6/13/09 (capping at 6.375%).  The good news here is that the rate is still 1% below last year’s level. 

Conforming-Jumbo, or Fannie Hi-Balance, rates have experienced a similar climb and currently sit at high last reached in late January.  The Conforming Jumbo has been much more volatile than the regular conforming rate due to the Fed buying of conventional mortgage backed securities in much greater numbers than the high balance securities creating a bit of a falsely lower rate for the conforming.

FHA rates have risen less than the conforming products, up only 0.50% (one-half of one percent in rate) during the past four weeks, partly because of the spread that was created by the Fed buying conforming MBS during the past several weeks generating a greater spread because of the lower conforming rates.  Now that the market has been flooded with MBS due to the huge number of refinances put into the market in March, April and May the rates have climbed on conforming to narrow the spread with the FHA mortgages. 

As you can see the chart is up the past four weeks and has broken from the relative stability we have seen the past thirteen to fourteen weeks.  Listening to the chatter out there it is as if the market has come to a crashing end with our rates climbing, take a breath and look at the chart for the past year.  Yes, we are in an up rate environment.  Yes, I have been forecasting higher rates, and I think we have some more room to roam upwards.  Yes, I think that there is an excellent chance we have seen the bottom on rates.  All that said I, we are still in an excellent market for purchasing a new home.  Prices in some areas are firming up and rates are still really, really low—heck we are 1% below a year ago.

Taking a look back through my Friday rate charts from 2005 – 2008, here are the annual high rates and dates.  Please note that I have always used the same criteria for my Friday rates so we are always comparing apples to apples.  Highest conforming rates:

            2005:   November 6.125%

            2006:   July 6.5%

            2007:   August 6.375%

            2008:   June: 6.375%

            2009:   Today: 5.375%

Keep in mind that in 2005-2007 there were more lenders, more programs and more options for borrowers which should have led to lower relative rates. 

I do think we will reach the highs shown in the past several years, my prediction is that we will reach these rates sometime at the end of 2009 or early 2010—after the economic recovery has begun in the Fall sometime and becomes more widely reported.  As for our current up-rate cycle, it is my feeling we will start to stabilize between today’s rate of 5.375% and 5.75% in the next couple of weeks and that will be our range through summer.  I could be wrong, I might be wrong, but that is what I am predicting.

Rates up again this week—Always hard to quote rates early in the day as trading is still going on and we may see rate changes today for the better, but as of 10:30 PST:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  5.375%              UP 0.125%

30 year conforming-jumbo 5.875%      UP 0.125%

30 year FHA    5.5%                           FLAT

30 year FHA jumbo 6.25%                  UP 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

First day of summer vacation today!  Our no longer a first grader Jenna is the one I have to practically drag out of bed Monday to Friday from September to June when it is time to get up at 7:00.  This morning I came back from my morning walk with Harrison just before 7:00 and she was already up!  No sense sleeping in and wasting all that nothin’ to do on vacation! 

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.