Back during the housing boom, condos came on the market like they were rolling off of a production line. Banks financed these loans without regard to your IQ or your ability to repay. Consequently, they got burned as thousands of condos went into foreclosure.
In order to reduce their losses, lenders tightened their lending practices. But if the pendulum swung too far toward the irresponsible back at the market’s peak, it’s now gotten extremely difficult to finance (or refinance) condos today. This is a policy that carries it’s own risk.
Our thanks go to Scott, who wrote us to tell about trying to refinance his condo- and his experience has been less than positive. We always love to hear from readers about their real world experiences, so with Scott’s kind permission, here’s his story:
My wife and I have great credit scores and our only debt is our mortgage. We have $190k in equity in our condo, have a fairly significant liquid net worth, and I have a stable job. In spite of that we cannot refi our condo.
Our loan to value after appraisal came in at 63%. That was below 70%, so that increased the initial rate. Then we found out that Fannie Mae condo guidelines say that 51% of our condo complex have to be owner occupied. Well, we have a fourplex with two owner occupied units or 50%. 51% would be 2.04 owner occupied which is of course not possible. Obviously it would need to be 3 of 4.
We were told that one of our units in the past three months was late on their HOA dues and you cannot have more than 15% late. One of four is 25%. That almost killed the deal before it was determined the information from the HOA company was inaccurate and no one was delinquent. So it was declined.
I am hearing how difficult it is to qualify for loans, especially if it is a condo. Low rates don’t mean much if no one qualifies. You would think that small condo complexes would be exempted from some of this, or that they would be more flexible if you are just trying to refinance your principal residence, but obviously not.
On the one hand the government wants to help reduce foreclosures and to allow refinancing to help lower people’s payments, but then at the same time they make it more restrictive to qualify— it just doesn’t seem to make sense. Bernanke recently said how QEII would help to lower rates and put money into consumer’s pockets so they will spend more. Rates have been low recently but if you cannot refinance what good are they?
All condo projects are not created equally. It is easy to see why Fannie Mae would hesitate to finance units in a large development that is half empty. Depending on the location, though, a smaller project seems less risky.
While lending money to everyone and their dead dog’s cousin was a risky policy, not lending money carries its own risk for the housing market as well. Rather than worrying about “tight lending” or “loose lending”, maybe it’s time for “sensible lending”.
Best of luck to Scott and to everyone else who keep trying to make their mortgage financing work. Sisyphus can relate.