When looking to purchase a condo, there are additional things to consider about the building itself that many home buyers are unaware of. It is possible to be denied for a mortgage based on the information about the building and the viability of the association even though you are financially qualified to purchase the property. Below are a few of the reasons why a lender may not approve a loan within a particular building, otherwise known as the condo conundrum.
Concentration of Investors
The higher percentage of investors in the building, the higher the risk for a lender. An investor is considered someone who owns the unit and rents it to someone who is a tenant. Tenants typically do not take as good care of the property as someone who owns and lives in the unit. As a general rule of thumb, lenders do not like to see the total number of investors in a building greater than 50%.
One Person Owns Multiple Units
If one person owns 10% or more of the total units, this is a red flag for a lender. The reason lenders do not like to see this is because it may be a sign the building has more rentals than owner occupied units. It could also significantly impact the viability of the association if that person got into trouble and stopped paying their association dues for all of the units they own.
A lender will want to be sure that there are not a lot of owners who are behind on monthly association dues or assessments. This is capped at 15% of the total number of units. If the unit owners all stopped paying, then the association would run out of funds to maintain the property. The lender guards against this from happening.
If the project contains any commercial space, a lender wants to ensure it is no more than 25% of the total square footage of the building. They want to know the building is mostly residential in nature.
You will often see suits brought by owners against the association and lenders do not like to see this. It could affect their interest as a lienholder on a property. Even though some litigation may be okay, you will need to find out details if there is any pending litigation.
Please feel free to contact me at (312) 285-6644 with any questions you might have. And if you are a neighbor in Bowmanville, please say hello!
Heather McRae is a residential mortgage lender. She was first introduced to the real estate industry in 2001. Heather lends throughout the State of Illinois and specializes in condos within the City of Chicago. She is a proud resident of Lincoln Square’s Bowmanville neighborhood.