One of the most common issues a condo buyer or seller faces in obtaining financing is meeting the owner-occupancy ratio required by lenders or the FHA. Owner-occupants means the units are actually occupied by their owners as primary residences, rather than those owners who choose to rent out their units. Renting units out is particularly popular with long-time owners, who bought a unit years ago, used the equity to buy a bigger property which they moved in to, and kept the original condo as an investment property. A good way to build wealth, but now causing headaches for other owners in the building.
The tightening of the credit markets in the past few years has been particularly hard on condos. Even long-standing buildings in the most popular parts of the Washington area are now facing problems with financing. This obviously matters to buyers because it’s difficult to get financing. Many condo owners, however, don’t realize until they go to sell that it’s an equally big problem for them—if loans aren’t available at competitive market rates, then the pool of potential buyers becomes very, very small.
FHA has always been harsh on condo lending (see post here for more). They currently require at least 51% of the units to be owner occupied as one of the many hoops they make condo buyers jump through. New rules on the horizon call for this to be reduced to 50%. That same set of new rules (which has been delayed in implementation several times) calls for the pre-sale requirements of new construction projects to be eliminated. Currently, at least half of a project must be pre-sold before FHA will do loans in a building.
But in today’s climate, even conventional loans can be difficult to get in a low owner-occupant ratio building. Many conventional loans (or rather, the investors who purchase those conventional loans) require the building to be 60% or even 70% owner occupied! If the loan is Fannie Mae or Freddie Mac eligible then certain requirements apply as well. Who would have thought that conventional loans, with their larger down payments, would be stricter than FHA?!
So what can you do if you are a seller trying to sell (or refinance) your unit in a high investor ratio building or a buyer trying to buy one?
First, ask your lender whether the condo is subject only to a limited review, rather than a full review. Many lenders aren’t aware of the limited review option. In a limited review, the lender doesn’t even ask for the occupancy percentage.
Next, see if there are any REO (bank owned or foreclosed) units in your building. Recent changes allow lenders to count REO as owner-occupied.
While these rule changes may help, if the ratio is still too high, then as a seller you have no choice but to find a buyer who has all cash or is willing to take on a non-30-year-fixed mortgage, for example a 5/1 ARM or 7/1 ARM. Rates are low enough now that you have a shot at that, especially if you are able to offer the unit at a low enough price that a buyer is willing to take the risk. And as a buyer, the 5/1 or 7/1 is not a bad option if you don’t plan on staying in the condo very long, or as long as you have reasonable caps on the interest rate hikes going forward.
If you’re looking for a top notch lender to help you refinance or purchase in a high-investor building, please contact me. I recently refinanced my own condo which fell in between 50% and 75% owner occupancy so faced some of these challenges. And if you need to sell your high-investor condo, let’s talk about your options and how a marketing plan might need to be adjusted.
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