Condo Financing. Tips on buying a condo in Nashville.

Over the last few years I’ve worked with several clients who “just wanted to buy a little condo in town” but didn’t realize the complications they would run into along the way.  I decided to write this article to explain the process in a little more detail.  I recently ran across an informative article from the Chicago Tribune entitled “Condo deals die in shadows of financially distressed buildings” which I recommend. While this article is Chicago-based, the ideas and issues overlap completely with the Nashville condo market. As you may know, I’ve worked extensively in the urban condo market, though not with the regularity I enjoyed before 2008 . There just aren’t as many buyers in the condo market right now. While there are many reasons for the drop off in activity, most people blame the flailing economy. Of course, that is probably the main culprit, but a lack of suitable financing may be an even more common, yet under-reported, problem.

Most buyers don’t really think about financing when they begin to think about buying a condo in Nashville. They know how much they can afford on a monthly basis. They know what they can afford to pay toward down-payment and closing costs. They just assume that if they have the credit score and cash-on-hand to qualify, they will be able to get the loan they need when the right condominium pops on the market. What most buyers don’t realize is that it isn’t just the person that the bank must qualify – the building must pass muster too.

When you buy a home or condo with a loan, you will likely choose one of two options. You will either choose a conventional loan which requires a traditional down-payment, or you will choose an government backed FHA loan which only requires a 3.5% down-payment.

Conventional loans have traditionally required a down-payment of 20%, however, you can still find options out there offering 10% down and sometimes even 5% down (though most lenders still want 10% on condos). When a lending institution qualifies you for one of these loans, they may ultimately sell your loan to Fannie Mae or Freddie Mac. Even if they don’t intend to sell your loan, the bank wants to retain the OPTION to sell the loan down the road. That means that your conventional loan will need to conform to Fannie Mae and/or Freddie Mac guidelines today, and this is in addition to any lender-specific guidelines that may already be in place. The rules are complicated and they are a perpetual moving target, but there are all sorts of things that can disqualify an existing building. A few are:

• too many investors/renters
• pending litigation
• inadequate reserve funds
• high concentration of commercial space
• too many existing FHA loans

The rules are even more complicated when the building is new construction.

To make things even more tricky, there is no centralized place to find the answers to these questions for each development. Typically a buyer has to get the president or manager of the Homeowners Association to fill out a Condo Questionnaire. The questions will vary by lending institution and many HOAs will charge a fee before they will fill one out. That’s right, Ghertner & CO., Nashville’s largest property manager, wants the buyer to pay them a fee BEFORE just to find out if a loan is possible.

With FHA, things are a little more cut and dry. Either the development is approved or it isn’t.  FHA used to check and grant spot approval to developments whenever the buyer applied for a loan, but these days HUD has a website that you can log into (?between the hours of 8am and 5pm?) to find out if a condo development is approved or not. This is a relatively recent change and not all associations have taken the expensive and time-consuming plunge. I should mention that this FHA-approved status is only granted for a year before the HOA has to jump through the same hoops again.

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When I first got into real estate condos were referred to as the red-headed stepchild of the market – bad investments that were a pain to buy and sell. But over the years, urban living has become much more attractive. Condos, especially those in urban centers, near water, or near colleges appreciated faster than most any other section of the real estate market commanding prices that would have been unthinkable ten years ago. Many of these FHA and Fannie Mae rules have always been in place, but the under-writers just didn’t care or think to check on them. We all now know that the days of easy mortgages are over, and every mortgage under-writer wants the answers now.

I’m not saying that you shouldn’t buy a condo. Far from it. Condominiums and lofts can be the perfect solution for first-time buyers, young professionals, those who travel often, second home purchasers, empty-nesters, college parents, or anyone who prefers a more urban lifestyle. I guess what I’m trying to say (in a round-about way) is that you should be prepared before entering the condo market. Choose an agent and a lender with experience. Don’t make ANYTHING concrete in your contract until you are satisfied that you have the answer to every question. .

Steph’s Tips When Buying A Condo:

• Ask the seller to provide the following HOA documents:  Bylaws, Rules & Regulations, Reserve Study, Recent Meeting Minutes, Balance Sheet within a certain timeframe. Make your offer contingent upon this.
• Find out if the Bylaws govern the investor percentages in the building. If not, you may end up buying a condo that qualifies for a mortgage today, but may not when you go to sell it later.
• Be prepared to make an initial contribution toward the HOA fund at closing. Many HOAs have a transfer fee and require a two month cushion be placed in reserve upon transfer. Your lender won’t know the rules specifically for each development initially so make sure you build a cushion for possible fees at closing.
• Get H06 insurance. Similar to renter’s insurance, this policy will cover damages to your contents and give you additional liability coverage. Many lenders are starting to require H06 insurance.
• Know what is covered by your monthly dues. Most HOAs will maintain your roof and siding, but many don’t cover HVAC, doors, windows, and plumbing.

Recent Condo Listings in Nashville

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