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Buying condos 101

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While a great investment, Guaranteed Rate wants you to know there are some rules you should be aware of in order to ensure a smooth loan process. Condominiums are a great way for a first time homebuyer or new investor to enter the market; however, there are some lending rules you should be aware of before you sign a contract.

Lenders consider several variables when underwriting your loan; however, a lender’s main concern is whether or not the condo building is warrantable. Condo warrantability will differ between existing condo buildings and newly constructed condo buildings.

When addressing the warrantability of a condo building, the lender wants to know:

About any pending lawsuits against the association. A lawsuit is a red flag and you should quickly learn the details of the lawsuit before signing any contract or making any offers. As a general rule, slip and fall suits along with foreclosure suits will not kill your loan. Structural defect suits are an issue and before proceeding you should talk with your mortgage professional.

No lawsuits = Warrantable Condo Building

How many units are rented to non-owners. In the case of rental percentages, there is a difference between a new condo building and an established condo building.

A new condo building requires at least fifty-one percent of the units are sold to owner occupants and forty-nine percent can be rented units.

Established projects will allow in excess of forty-nine percent rental units, provided, you are occupying the unit you are purchasing.

Within the allowable occupied/rental percentages = Warrantable Condo Building

If the building allows blanket mortgages. Blanket mortgages cover two units under one mortgage. This is typically not an accepted practice; however, you should speak with your mortgage professional as there are many components and you may be within the guidelines.

Association does not allow blanket mortgages = Warrantable Condo Building

How much money does the association’s reserve fund contain.  If you are putting less than twenty-percent down, the lender will want to review the association’s annual budget. The lender wants to ensure the association has savings (or reserves); the requirement is ten-percent of the budgeted annual income.

Association has required reserves = Warrantable Condo Building

While the height of the condo building has no bearing on warrantability, its best to let your mortgage professional know your preference. Some lenders prefer not to lend in projects that are too high (more than 8 stories) or contain too few units.

When shopping for a condo, be sure and ask the seller about pending lawsuits, rental occupants, blanket mortgages and the association’s reserve fund.  It’s better to know whether or not you are looking at a viable building to purchase in or if you should move on to the next.

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All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.

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