Buying a Newly Constructed Condo?By: Selene Garcia
In an effort to provide easy to understand educational mortgage topics, Guaranteed Rate offers condo mortgage rules for buying newly constructed condos. There are many condo building features your lender will be concerned with whether you’re purchasing a unit in a new or established condo building.
When purchasing a condo unit, lenders want to ensure the entire condo project (the building) is warrantable. Warrantability refers to the favorable, or unfavorable, features of a condo building and whether or not a lender is willing to offer mortgages to buyers based on those particular features.
While there are some lenders that offer financing for non-warrantable condos, available rates and programs are not as competitive and typically require a higher down payment. Speak with your mortgage professional to learn more about purchasing non-warrantable condo units.
Warrantability for an established condo building focuses on pending lawsuits, non-owner rental units, blanket mortgage clauses and the association’s savings; however, there are additional requirements for newly established, or rehabilitated, condominium projects.
There are two ways a new condo project can be approved as warrantable:
Project Eligibility Review Service (PERS)
A PERS approval allows a developer to have the entire condo project approved by Fannie Mae prior to the completion of the project. This type of approval allows buyers to obtain competitive financing due to more flexible condo requirements.
For more details, speak with your seasoned mortgage professional about Fannie Mae PERS reviews.
If the development you’ve chosen has not been approved by Fannie Mae through a PERS approval then the building of your choice will need to meet the following requirements:
70 Percent Owner Occupancy. The lender requires 70 percent of the units sold, or under contract, are either occupied by an owner or used as a second home. For the lender, high owner occupancy in a new building translates into a safer investment (i.e., owners have a vested interest in the care and maintenance of the building).
Complete Construction. Lenders require the completion of allcommon elements such as: hallways, lobby, laundry and exercise facilities prior to any sale. From the lender’s perspective, if the developer runs into financial challenges, an incomplete building can negatively impact the value of their collateral.
Additional Phases. The lender wants to ensure the building is not subject to additional construction (i.e. additional towers or floors which need to be completed). Again the concern here is the lender’s investment – at minimum the project should be completed.
Condo Association. In a new project, the developer will hand over control of the association to the building owners when about 75 percent of the units have been sold.
To be clear, your lender is looking for all of these questions to be answered with a yes. If no is the answer to any of these questions, the project is non-warrantable and you’ll need to adjust your financing expectations.
With regard to warrantability, Fannie Mae will sometimes make exceptions for an already established condo building; however, with newly constructed condo buildings Fannie is very clear about the requirements.
When in the market for a condo, be sure and let your mortgage professional know what type of building you prefer – new construction or an already established condo building.