[Updated November 2018]
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. Some Nashville condos simply won’t support traditional loans 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.
- 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.
- Owner-occupancy ratios come into play depending on your intended usage. For instance, if investors own more than 50% of the units in a given building, it can be challenging to finance as an investor or second home buyer. Rules on investor ratios have recently relaxed for owner-occupants.
- Buildings that allow short-term rentals generally require specialty financing.
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 the guidelines above. 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 are 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. These specialty loans are only available from select local lenders and the terms aren’t usually as attractive as conforming loans.
To combat some of these financial challenges, many developments have hired attorneys to revise their HOA bylaws. Typically these changes will restrict the number of investors that are allowed to own units within a complex. The HOA will usually “cap” the number 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 without a good workaround.
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 (HPR)? How about a zero-lot-line property? Banks will approach each of these types of dwellings differently. It’s arbitrary and can be 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.