Reprinted from

By Beau Brincefield

The ready availability of mortgage financing is essential to maintaining the values of the homes in any given community. Unfortunately, in recent years there has been an increasing number of condominiums that have found it difficult, if not impossible, to find mortgage financing for purchasers.

The primary reason for the development of this problem has been the decreasing percentages of owner occupants in those communities. This percentage is sometimes referred to as the owner/investor ratio. If the percent of owner occupants in a given community falls below 60%, financing will become more difficult. If a downward trend continues and falls below 50%, it may become impossible to find financing.

If not halted and reversed, a downward trend in the percentage of owner occupancy can become self perpetuating. If new purchasers can’t qualify for financing, current owners who move from the community have to hold on to their units and rent them out in the hope of covering their mortgage payments and association fees. Their units then become investor-owned units instead of owner occupied units which makes it even more difficult for the next purchaser of a unit in that community to find financing. The lack of readily available financing causes sales to stagnate, and as a result values of units in the entire community to fall.

… an increasing number of condominiums have found it difficult, if not impossible, to find mortage financing for purchasers.

In order to understand how to halt and reverse this trend, it is necessary to understand a little bit about how mortgage lenders decide whether or not to make a loan in a given community.

In general, mortgage lenders would like to sell the loans that they originate. This is done through what is called a “secondary market” mechanism. In order for originating lenders to be able to sell their loans in the secondary market, the loans have to meet certain criteria that are established by organizations such as the Federal National Mortgage Association (FNMA or Fannie Mae), The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Veterans Administration (VA) or the Federal Housing Administration (FHA).

When developers build new condominium projects, they usually obtain project approval from one or more of these entities. Within a few years after developer sales have been completed project approvals will expire and it will be up to the individual mortgage lenders to gather current information about the project before they can be assured that the loan they make in the community will be eligible for sale in the secondary market. (VA does not require any updated information as long as the project previously obtained VA approval.)

For the most part, all lenders will require the same basic information about a community: they will need a current budget and current financial statements from the owners’ association, a master certificate of insurance, and a certifiable statement as to the current percentage of owner occupied units. Ninety percent of all the homes must have been sold or conveyed from the developer; no more than 10% of the community can be owned by any one person or entity (for example, units retained by the developer.) All common areas must have been completed (with no further phasing or annexation contemplated); and there must not be any significant pending litigation or any major delinquencies with respect to unit assessments. Finally, there may be a few other miscellaneous specific requirements that may be somewhat different depending upon the lender and the type of financing contemplated.

In general, a condominium community must have at least 60% owner occupancy to be approved by Fannie Mae and Freddie Mac. FHA requires at least 51% owner occupancy unless the purchaser is willing to become an owner occupant and will replace an investor and the individual transaction will increase the owner occupied ratio to at least 50%.

… there have been several lenders who have decided to go the extra mile in providing financing to communities that may be on the edge, or just over the edge, of owner occupancy ratios.

Obviously, community managers and homeowners in condominium communities need to maintain an awareness of the percentage of owner occupancy in their communities and they need to develop reliable tracking mechanisms to monitor their owner occupancy ratio as well as other eligibility criteria. This becomes even more critical if a declining trend is noticed and the owner occupancy percentage starts heading below 60%.

If a downward trend is noticed, however, there are some steps that can be taken to try to arrest and reverse the trend. Even though sometimes time consuming and expensive, lenders can request exceptions from the customary secondary mortgage market criteria from the appropriate entity to whom, or through whom, their loan would be sold. Also, community management can try to keep track of which lenders are making loans in the community in order to assist homebuyers with finding lenders who are already familiar with the community and willing to make loans in it.

In the past couple of years, there have been several lenders who have decided to go the extra mile in providing financing to communities that may be on the edge, or just over the edge, of owner occupancy ratios. These lenders typically compensate for the additional risk either by charging somewhat higher rates and/or fees, or by placing loans through the Community Reinvestment Act.

Finally, some state and local jurisdictions may have special financing programs available. For example, the Virginia Housing Development Authority is currently soliciting applications for demonstration projects in which they would offer loans in communities that do not otherwise satisfy customary secondary market criteria.

It is important for every seller of a condominium home to realize that, no matter how well qualified your purchasers may be, they may find it difficult, if not impossible, to find acquisition financing if any aspect of your community, especially the percentage of owner occupancy, fails to satisfy the secondary market criteria.

The author would like to express his appreciation to Kevin Connelly of Mortgage Edge Corportion and Rick Eul of First Union Mortgage Corporation. They gathered and provided the substantive information presented with this article.

Reprinted from Quorum magazine, a publication of the Washington Metropolitan Chapter of the Community Associations Institute, June 1999.