Many buyers don’t know that buying a condo is unlike buying a single family home. Banks have different rules when financing condo units. It isn’t just about the Buyer and their qualifications; it’s also about the Building. Post-recession there have been huge changes to condo financing rules. Many of Nashville’s urban condos simply won’t support a traditional loan at the moment. This is particularly true very near the Vandy/Belmont corridor.
In order to get a traditional conforming loan on a condo, the building itself generally has to meet the following criteria:
- At least 51% of the development must be occupied by owner-occupants (or utilized as second homes).
- No more than 20% of the development can be occupied by commercial space.
- No pending lawsuits within the HOA.
- No more than 10% of the HOA can be managed by a single investor.
- The HOA must have acceptable financial reserves.
- No more than 15% of the total unit in a project can be more than 30 days delinquent in their dues.
It’s important to note that these rules can vary slightly from bank to bank and from Freddie to Fannie. Here you can review a sample Condo Questionnaire. This is the form that your lender will submit to the homeowner’s association during underwriting to see if the building conforms to their stated financing criteria.
There are a whole slew of urban condos in Nashville that don’t meet these guidelines. In the business we call them “non-warrantable.” There used to be widely-available specialty loans to fill this space in the market. The loans were known as “portfolio” loans. A portfolio loan is a loan that the issuer keeps and services in-house. They can never sell the loan to Fannie Mae or Freddie Mac for servicing because they don’t “conform” to stated guidelines. However, these speciality loans are almost extinct at the moment- at least they are for condos.
The only bank I’m aware of locally that is offering portfolio loans on non-warrantable condos is Franklin-Synergy. When I spoke recently to loan officer Michael Dorris, he told me that:
- interest rates are very, very competitive
- down-payment requirements as low as 10% (situationally)
- loans are amortized over 30 years, but structured on a 6-year balloon (meaning that after six years you will need to sell, refinance, or pay off the balance).
To combat these financial challenges, many developments have hired attorneys to revise their HOA bylaws. Typically these changes will restrict the amount of investors that are allowed to own units within a complex. The HOA will usually “cap” the amount of allowable investors to somewhere between 20% to 50% and issue leasing permits for available spots. At the time of writing almost all of the downtown Nashville condos have reached their cap (think Viridian, Bennie Dillon, Encore) and there is a waiting list of current owners queueing to become landlords. It can be a challenge to buy a condo downtown at the moment as an investor. While these bylaw changes do help in finance-ability, they hinder in other ways. What if you intend to use your unit as an investment rental in the future? What if you have a quick job transfer and can’t sell for profit? It is a Catch-22.
To confuse matters a little bit more, banks have varying rules in exactly what they consider a condo to be. In general a “condo” will include some element of vertical living, whereas a townhome is typically horizontal in construction (no one living above or below someone else). It really comes down to the way the property was deeded by the developer when the papers were first drawn up and filed with the clerk. Did they call it a condominium complex? Or a Planned Unit Development (PUD)? Or maybe a horizontal property regime? How about a zero-lot line property? Banks will approach each of these types of dwellings differently. It’s completely arbitrary and can be really frustrating.
One thing to know is that townhouses are usually much easier to finance. Rental ratios are generally not considered or policed in townhouse developments. That is one reason I think they can be a smarter purchase for some buyers – particularly investors.
Finally, if you are interested in purchasing a condo in Nashville, be diligent in choosing your agent. Agents who don’t often deal with condos may not understand the intricacies. Experienced condos agents can definitely save you time and effort. No one likes to spin their wheels needlessly, that’s why our team insists on an in-depth consultation before taking on a new condo buyer.
If you have questions about buying a condo in Nashville, we’d be glad to help. You can reach us at 615-266-6778 or by emailing us.