NEW YORK (BankingMyWay) -- Data in recent months suggests that the housing market is on the mend, so perhaps it really is time to get serious about that condo you’ve wanted for a new home, vacation place or investment. If so, be ready for an ordeal: the lender will want to approve the condo community, not just you.
At best, it's a hassle thanks to the added layer of paperwork. At worst, your loan could be denied due to problems with the community, even if your own loan application is perfect. You could spend months waiting for a loan approval only to be disappointed at the last minute and forced to go back to the drawing board.
It’s hard to know for sure whether your condo community will pass muster, but a smart shopper looks for red flags that suggest a given community is not worth one’s time.
As we’ve reported previously, in the wake of the financial crisis most mortgages are backed by government-sponsored entities like Fannie Mae, Freddie Mac and the Federal Housing Administration, all of which have imposed tough rules on loans for condos. They worry that high rates of foreclosures, too many vacancies, or too many residents failing to pay association dues could cause a community to deteriorate. Before a lender can approve a condo-loan application, the condo association must complete a pile of paperwork. Some associations charge several hundred dollars for this.
To avoid nasty surprises, the condo buyer should be alert to potential snags from the very start.
Here are some tips for recognizing condo communities that may in trouble:
Of course, you can avoid a loan denial by paying cash. It could be easier, for instance, to buy a vacation or investment condo by borrowing against your primary residence, assuming you have lots of equity. You’d probably get a slightly lower loan rate this way, since many lenders charge 0.5 to 0.75% more for a condo loan. But if the condo community is troubled enough to make a mortgage uncertain, it will probably make sense to look elsewhere even if you can pay cash. Although some savvy buyers will get great deals by bottom fishing, it takes a lot of experience, knowledge of the local market and comfort with risk to make this kind of speculation work.
There’s no shortage of units for sale today at good prices, so there’s no reason to take a chance on a troubled community.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.