Financing a Condo – Less is More

AZ Condo Regulations

Condo Mortgage Guidelines

When financing a condo purchase, there are multiple layers that an Arizona Mortgage Lender must analyze.  As with any home loan application, the lender must first approve the individual buying the condo based on their employment, income, assets, debts and credit profile.  In addition to approving the buyer, a lender must also take an in-depth look at the condo being purchased along with the HOA that manages it.  This second piece can create quite a wrinkle in the mortgage approval process.  Here is why: If the condo does not pass the property approval process than the buyer cannot obtain a loan on the property and their purchase transaction may come to a complete stop as a result.  When utilizing Conventional mortgage financing to purchase a condo in an established project there are 2 different types of condo/property approval processes a lender can follow:

1. Limited Review
2. CPM or Full Review

The process that a lender utilizes depends upon the details surrounding the buyer’s purchase (see below for more details).  A CPM/Full Review requires the buyer’s mortgage lender to dig deeply and analyze virtually every nook, cranny and crevice of the HOA and condo project.   A CPM/Full Review exposes the condo project to many more potential hurdles that can complicate a condo purchase such as:  – The HOA budget must show that 10% of revenue collected from HOA dues must be allocated to “reserves” for the project to be eligible The good news is that there is a much better option that allows an Arizona condo lender to streamline the entire condo property approval process.  It is called a Limited Review.  A Limited Review allows a Phoenix area condo buyer’s lender to skip the review of the HOA’s legal documents which helps skip past potential transaction show stoppers.  For example, this would eliminate the need to review the percentage of HOA dues allocated to reserves noted above.

Condo Approval – Limited Review Eligibility

In order to be eligible for a Limited Review a buyer’s transaction must meet specific Loan to Value criteria (Loan to Value is also called “LTV”).  LTV simply refers to how much a condo buyer is borrowing compared to the value or purchase price of their new home (whichever is lower).  For example, if an AZ borrower is purchasing a condo that is priced at and appraises for $300,000 and they are borrowing $240,000 their “LTV” is 80% ($240,000 equals 80% of $300,000).  The LTV requirements for a Limited Review on a condo purchase are: OWNER OCCUPIED: 90%* SECOND HOME: 75% INVESTMENT PROPERTY: Not allowed *Must be approved per LP/Freddie Mac

Keys To 10% Down Primary Residence Purchase

In order for a buyer to be eligible for a 90% ltv mortgage (in other words a loan with only 10% down) their AZ condo lender must be able to approve their loan through Freddie Mac’s automated underwriting system called Loan Prospector or “LP” for short.   Why?  Simple – Fannie Mae requires 20% down when utilizing a Limited Review and Freddie Mac allows Limited Review with only 10% down.  Some lender’s only work with Fannie Mae so it is critical to make sure the condo buyer’s lender has the ability to sell loans to Freddie Mac in a 10% down condo purchase scenario.  If not, a 10% down condo buyer may find themselves jumping through the hoops associated with a CPM/Full Review to obtain condo approval. The other key to success with 10% down on a condo transaction that is a MUST relates to mortgage insurance.

If a buyer is looking to finance a condo with 10% down they must also obtain a mortgage insurance policy due to the fact that they are putting less than 20% down.   Most mortgage insurance companies have their own condo guidelines that are similar to CPM/Full Review guidelines regardless of how much a buyer is putting down.  In order to be able to truly utilize a Limited Review and make the process much more simple, the buyer’s lender must find a mortgage insurance company that mirrors agency regulations (agency relates to Freddie Mac in this case) when approving a buyer for mortgage insurance on a condo purchase.  As long as the mortgage insurance company being used to insure the buyer’s new mortgage mirrors agency guidelines than a Limited Review will be accepted by both the buyer’s mortgage underwriter and the buyer’s mortgage insurance company’s underwriter.  One leading mortgage insurance company that  currently mirrors agency guidelines with respect to condo’s is a company called Genworth. Hopefully this helps you navigate through your Phoenix condo purchase or the sale of your AZ condo (help with screening buyers).  If you have any condo questions please call.

By Jeremy House
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Comments

  1. Great post. I am going through some of these issues as well..

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  1. […] access to both DU and LP can also make a huge difference for an Arizona condo buyer: Click HERE for […]

  2. […] a home loan on a condo is a unique process.  In addition to getting yourself approved, the condo project itself has to pass a home loan eligibility test.  While a condo project / HOA may pass the home loan sniff test, […]

  3. […]  Condo home loans require the entire condo project/HOA be scrutinized for financing eligibility.  Condo property approval requirements differ based […]

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