Buying a Condo on Marco Island Using a Mortgage

Fannie Mae and Freddie Mac new mortgage guidelines have been implemented for condominium unit purchases since the 2008 Real Estate meltdown. There are limited review and full review purchase rules and regulations for condo unit borrowers. Getting mortgage loans for condos approved can be a bit more complicated than loans for single-family homes. Not only do borrowers have to qualify, but the condo project itself must be approved by the lender, on behalf of Fannie Mae and Freddie Mac. Because Fannie and Freddie buy most conventional loans, they also make the rules!

The loan review process starts with the lender sending a condo questionnaire to the condo association. There are two types of questionnaires: the full review and the limited review. Determinations on which is used are based on loan-to-value and the intended use of the subject property. 

Condo questionnaire responses determine whether a project meets Fannie/Freddie guidelines, which, in turn, dictate whether the lender will approve the loan application. Some of the information lenders review in their decision-making process are, litigation in-process, master insurance policies in-place, owner vs. renter concentration, condo association delinquency rates and the ever-notorious budget, deferred maintenance. This is just a sampling, depending on which questionnaire is utilized. 

Now that we have a brief overview of the process, what are we seeing in Marco Island’s condo market? Moreover, what should a realtor do upfront to help ensure success for the borrower and the transaction? Let’s tackle the first question by taking a look at what’s happening locally. 

In September of 2017, Hurricane Irma hit Marco Island, causing millions of dollars in damage. Naturally, many condo communities were dramatically affected. In some cases, needed repairs are just now being completed or have recently been finished. This situation has led to numerous lawsuits over insurance companies fighting claims. Just because a condo association is the plaintiff in a lawsuit, that doesn’t mean litigation won’t be an issue. If the work hasn’t been completed, in-full, because of insurance litigation, Fannie and Freddie want to be assured of a few big items. Below is snippet directly from the Fannie Mae Selling Guide:

If the lender determines that pending litigation involves minor matters with no impact on the safety, structural soundness, habitability, or functional use of the project, the project is eligible provided the litigation meets one or more of the following:

• Litigation for which the insurance carrier has agreed to provide the defense, and the amount is covered by the HOA's or co-op corporation's insurance.
• The HOA or co-op corporation is the plaintiff in the litigation and upon investigation and analysis the lender has reasonably determined the matter is minor and will result in an insignificant impact to the financial stability of the project.
• The reasonably anticipated or known damages and legal expenses are not expected to exceed 10% of the project’s funded reserves.
• The HOA or co-op corporation is seeking recovery of funds for issues that have already been remediated, repaired, or replaced and there is no anticipated material adverse impact to the HOA or co-op corporation if funds are not recovered.
• Litigation concerning localized damage to a unit in the project that does not impact the overall safety, structural soundness, habitability, or functional use of the project. 

Secondly, let’s talk about the budget. The budget is often the Number One reason for a problematic condo purchase loan process. For our area, a full-review condo questionnaire will require the Condo Association to be allocating 10% of the annual operation budget to reserves. Again, this questionnaire is based on loan-to-value. For example, if the borrower is buying the home as a primary residence and has a down payment of anything less than 25%, a full review will be utilized. If the borrower is a second home or investment buyer, and putting down anything less than 30%, a full review will be in play. And the budget will also be in play. In short, litigation and the annual budget are problematic issues when seeking mortgage financing.

Third, the increase in popularity of VRBOs and Airbnb’s has Fannie and Freddie on alert. Fannie and Freddie do not permit a condo development to allow for daily rentals. Daily rentals are anything less than a seven-day rental. If this is allowed by the condo development, the condo will be deemed to be a “condotel '' and the lender will deny an application for conventional financing. Condo associations need to be aware that mortgage underwriters are now taking to the internet to search and see if the association is permitting these short-term rentals. Often associations will reply on the questionnaires as a “no”, it doesn’t take place; however, short term rentals are running rapid in the community. This is an issue. 

So, what should the buyer's Realtor do to ensure success or to structure a transaction correctly to avoid issues during the review process?

First, pick up the phone! Call the condo association and ask if there is litigation in place. If so, start gathering basic info on what’s taking place and whether work is completed. This doesn’t mean you suggest your client not make an offer. However, you can make sure the lender knows upfront and they can start their request immediately. Furthermore, ask the association whether it is collecting 10% in reserves and request a copy of the annual budget. Get this to the lender at the very start. 

Because most condo issues revolve around these two items, as the Realtor, you can often save a lot of time and frustration. 

Third, make sure the condo development doesn’t allow daily rentals. If it is, you will need to inform the lender and see whether they have a portfolio loan product that allows for these types of short-term rentals. 

In short, take a little time upfront to save yourself time and effort later, and to make sure you shine in front of your client. You never want to have a client ask you, “Well why didn’t you know these problems existed before we started the offer process?”

Marc Creach is a Mortgage Lender for Cross CountryMortgage, LLC, on Marco Island. He has practiced in the area since 2014 and prior to that, he was a Realtor in Ohio for 12 years. Marco is the place he calls home. It’s also the site of his local office and where the vast majority of his business takes place. Marc runs a team that produces over $40 million per year in home loans. His right-hand partner is Zach Mick, who helps facilitate the home loan process for the team. Marc is also a Real Estate continuing education instructor for Florida’s DBPR and teaches an “Understanding the Condo Review Process” class for Realtor CE credits. Marc built this course for the DBPR of Florida to help ensure Realtors understand the condo purchase process.