Financing Condos in a Mixed Use Building

As if condo buyers didn’t have enough headaches trying to buy a condo with the new FHA rules in place, many are also running into troubles with “mixed use” buildings, i.e., condos that have residential units but also commercial space (usually on the ground floor or street level), as is common in urban areas like ours.

Examples of this commercial space may be a grocery store or restaurant on the bottom floor of the building or a convenience store as part of the lobby…all of which is very convenient, however, may create difficulties for obtaining the loan you want.  Under current Fannie Mae and Freddie Mac guidelines, financing becomes an issue if the commercial space is more than 20% of the entire project.  If it’s more than 25%, you cannot do an FHA or VA loan either.

After finding what seemed to be the perfect condo for one of our buyer clients in Alexandria, it was disappointing to learn a Whole Foods occupied 43,000 square feet (28.6%) of the building, taking some popular financing options off the table for our buyer.

Ilyce Glink  has this to say on the new financing rules for condo buyers:

Developers who built multi-use properties, with commercial, retail or restaurants on the first floor and condo units above may find that their properties will not be approved for financing.

Fannie Mae guidelines require that no more than 20 percent of a building’s floor area ratio (FAR) can be commercial. So if the building has 3,000 square feet, with a 1,000 square foot shop on the first floor and two 1,000 square foot condos above it, the property will likely not be “approved” and a buyer will not be able to get financing.

All this is bad news for condo buyers. Buyers who didn’t close before the end of 2009 may now find themselves rejected for financing if they are buying in a condo building that has not been approved or can’t be approved. Can you imagine the headaches this will cause?

Lenders say that buyers who need a loan to close on their purchase should ask whether a building is approved for financing before bothering to go for a showing.

She continues…

While there are some waivers being granted, condo buyers all over the country will find it more difficult to finance their purchases. These days, if you can’t finance a property, the number of prospective buyers will decline, and the property value could tumble.

What does this mean for buyers?   Expect headaches, long waits, bigger down payments and higher interest rates if you’re buying a condo in a mixed use building that has too much commercial space–assuming you can get financing at all! And if you’re thinking of putting an offer in, it’s wise to do some legwork on the building and with your lender before you go through the effort.

This is all thanks to the “tightening” of the credit markets that’s been going on since the bubble burst.  Will some of these rules loosen in the future?  I hope so.  Otherwise, current owners in buildings with high percentages of commercial space need to be prepared to wait it out.

This information deemed reliable but not guaranteed.  Every situation is different and you should check with your agent and a lender about specific properties.

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Will the New FHA Rules Kill Arlington Condo Sales?

On February 1, HUD and FHA rolled out major changes to the condo approval process. Previously, buyers wishing to use FHA financing had two options: If the condo was listed in the FHA’s “Approved Project” database, you were good to go.  But if it wasn’t, buyers had the option of going through the (now in hindsight relatively easy and straightforward) “Spot Approval” process, which typically could be completed within 30 days or so at minimal cost.  Spot approvals had to be obtained on individual units for each transaction — it was an exception-based process.  Given that condos are the main option for  many first time buyers, who may lack the 10-20% down payment required in conventional financing, we saw an explosion in the use of FHA financing, which requires just 3.5% down, in the past few years, and a lot of spot approval applications.

The approved database remains in place and is the easiest option, but the new rules scrap the whole Spot Approval system completely, and now require condos to go through a lengthy and expensive HRAP (HUD Review and Approval) or DELRAP (D.E. Lender Review and Approval) process. The good news is that once a community is through the HRAP or DELRAP process, their approval will potentially remain in place for several years and applies to the entire building, and future buyers can simply coast in on that approval.  You need only to check the database.

The process is much more cumbersome than the previous spot approval application, though, and these rules are all new.  As a result some lenders are deciding it’s not worth the time (4-6 weeks) or cost (several thousand dollars per review) to jump in to this arena just yet.  Some are letting other lenders “bite the bullet” on this one and will jump in later, after more condos are through the process and they can ride the coattails of lenders before them.

So what effect will this new hurdle in obtaining FHA financing have on Arlington’s condo market?

In the past 30 days, according to MRIS statistics, financing for sold condos (excluding retirement communities) was as follows:

Surprisingly, more than HALF the sales used Conventional financing!  This would indicate that the condo market isn’t going to come to a screeching halt after all.  But is there a difference based on price point?

Financing Used in Arlington Condo Sales by Price

Clearly there is heavier dependence on FHA in the under $300K and $300-500K price points, but I’m surprised it isn’t even heavier that this data indicates.   This indicates to me that the lower priced condos (under $300k) are going to be disproportionately affected, but also are unlikely to completely halt.  And look at the high percentage of all cash deals in that segment!

So it may take us a few weeks, or even months, to get the majority of condos through this painful new HRAP/DELRAP process, but hopefully in the long run it will be easier for everyone.  While we’re going through this initial launch phase, keep in mind that settlement times will be MUCH longer (remember that June 30 $8000 credit settlement deadline?) and buyers may incur thousands of dollars in extra cost if they’re the unlucky “first mover” in a building trying to do FHA.

* If you know you are going to use FHA to buy a condo, being under contract by April 30 is NO guarantee that a currently ‘unapproved’ condo can get through this process by June 30. *

*My advice is to get under contract EARLY if using FHA to buy a condo if you’re trying to beat the tax credit deadline.  *

And for those who can’t or won’t do FHA, remember ‘cash is king’ and you’ll likely need at least 10% as a down payment for a conventional loan.

And here’s another tip: If you’re looking at condos priced above $400,000 or so, contact me to discuss an important option that you may be completely missing in your search that would completely eliminate this issue!

To start your condo search, contact us — we’d love to help you!

Learn More: Attend a free First Time Home Buyer Class

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State of the Northern Virginia & DC Real Estate Market: January 2010

Spring has sprung early as far as the real estate market is concerned.  Buyers are out and circling, anxiously waiting for inventory to hit.  I know I’m starting to sound like a broken record, but the lack of ‘good’ inventory continues to be the story in real estate circles. Check out our market data graphs:  Arlington is down to 4 months of inventory and Northern Virginia is down to just 3 monthsThat’s the lowest level of inventory since August 2005. Remember August 2005?  When there were bidding wars, and properties sold for tens of thousands above asking??   Looking at the graphs, you can see that the number of contracts stays roughly the same each month (and has for many years)…so it’s not the buyers that are driving market changes…it’s the inventory.
The implication for buyers is very important: 1) get started early because it may take you a lot longer than you think to find the house you want and 2) when you finally do find one that meets your needs, jump on it!

As a result, sellers, if you’re considering selling, NOW is the time to get the house into shape and on the market!  There are buyers out there and I recommend you list sooner than later. As this article notes, the economy and tax incentives have upset the seasonal trend of a ‘spring’ market.  Please contact us if you would like to discuss how to best prepare and price your home for the market.
Changes were announced on Wednesday for FHA loans, which currently account for 30% of all purchase loans. The upfront mortgage insurance premium was increased from 1.75% to 2.25% of the loan value.  While most FHA borrowers can continue to make down payments of as little as 3.5 percent when they take out a loan, those with a credit score of less than 580 will have to make a down payment of at least 10 percent, possibly starting in the early summer. The agency will reduce seller concessions from 6 percent to 3 percent of the home’s value, in line with the industry norm, this summer.  They’re also tightening the screws (again) on condos.
I’ve scheduled a First Time Home Buyer class for January 26, 2010 at Arlington Central Library.  If you or someone you know is thinking of buying, please contact me to register.  The session is free, but space is limited and registration is required.  The next class is scheduled for March 3.

VHDA Loans Allow Financing of Down Payment

Down Payment Assistance in VirginiaThe Virginia Housing Development Authority has extended its Homebuyer Tax Credit Plus program to match the deadlines of the Federal First-Time Homebuyers Tax Credit.

VHDA’s program lets borrowers use a second mortgage to finance up to 5% of the sales price (enough to cover FHA’s 3.5% down payment requirement) by using the $8000 first time home buyer tax credit–effectively allowing borrowers to “monetize” the credit.  The second mortgage helps cover the down payment and closing costs, with zero interest and no payments for the first 12 months. Borrowers then have the option of paying it down within the first 12 months, using their $8000 credit to pay it off, or paying it off over 29 years.

There are restrictions on the program, of course.  Purchase price is limited to $408,100, and gross household income for two or fewer persons cannot exceed $86,900 for the Washington, DC, MSA, including Northern Virginia.

The deadline for the program matches the newly extended deadlines for the tax credit, so buyers must be under contract by April 30 and settled by June 30, 2010.

If you need help starting your home search, or finding a lender, please contact us.

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Learn More: Sign up for our free first-time home buyer class at Arlington Central Library on Jan 26 at 7:00 pm (registration required) Details and registration information can be found here.

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FAQ: High Investor (Low Owner-Occupancy) Ratio Condos: How Can I Buy or Sell?

Stratford Park PlOne 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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We’re honored to have been nominated as one of DC’s best real estate blogs.

If you found this post interesting or helpful, even if you don’t live in the DC area, please take a moment to vote for us by clicking below and registering your vote for Thank you!

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