Financing a “Kiddie Condo” for your College Student

A few weeks ago, I helped a Kent couple purchase a condominium located in Seattle for their daughter to live in while she attends college at Seattle University. They were prequalifed with their credit union, however the credit union was treating the transaction as if it were an investment property even though the couple (we’ll call them Mr. and Mrs. Kent) were not going to rent the property.

You see most lenders require that a home be located at least 50 miles away before it can qualify as a second home.  The city of Kent is just over 20 miles away from Seattle. Some lenders may even require that a second home meet conditions that one would consider a “vacation” property. It can really boil down to the underwriters interpretation of the actual scenario.  If a home does not qualify to be treated as a second home, then it’s likely to be considered an investment property which has higher interest rates, closing costs and tougher underwriting criteria.  

The Family Opportunity Mortgage is a special Fannie Mae/Freddie Mac program that we have available at Mortgage Master Service Corporation. It allows for this type of scenario to be treated as a second home as long as:

  • the property is a reasonable distance from the parent’s home
  • the parents may not own a second (or vacation) home near the subject property
  • the child is enrolled in a nearby college
  • the property may not be rented or used as an investment property
  • the child occupies the property for a minimum of one year

We were able to provide Mr. and Mrs. Kent with an “owner occupied” rate for the condo they purchased for their daughter where the credit union could only offer a non-owner occupied rate.

NOTE: Mortgage rates quoted below are from when I originally wrote this post on June 2, 2011 and are outdated. For current mortgage rate quotes for your home located in Washington, click here.

Here’s what the difference would look like based on today’s pricing for a condo* based on a sales price of $435,000 with an 80%* loan to value (down payment of $87,000) and 740 or higher mid-credit scores:

Family Opportunity Mortgage:

30 Year Fixed: 4.625% (apr 4.790).  Principal and interest payment (P&I) = $1789.

15 Year Fixed: 3.750% (apr 3.962).  P&I = $2531.

Non-Owner Occupied/Investment Property

30 Year Fixed:  5.125% (apr 5.311).  P&I = $1895.

15 Year Fixed: 4.250% (apr 4.489).  P&I = $2618.

*NOTE: Condo’s have a “hit to fee” of 0.75% with conventional pricing if the loan to value is over 75% or the mortgage term is over 15 years.  An additional 5% down also helps with pricing when you are financing an investment property.

Here is the same scenario as above except with 25% down payment ($108,750):

Family Opportunity Mortgage:

30 Year Fixed: 4.375% (apr 4.544).  Principal and interest payment (P&I) = $1738.

15 Year Fixed: 3.750% (apr 3.970).  P&I = $2373.

Non-Owner Occupied/Investment Property

30 Year Fixed:  4.750% (apr 4.900).  P&I = $1815.

15 Year Fixed: 4.125% (apr 4.426).  P&I = $2434.

Mortgage rates quoted are effective as of 8:00 a.m. June 2, 2011.  Rates can and do change often.  For your personal rate quote on a home located anywhere in Washington, please contact me.

Buying a Condo or Townhome?

Condos come in many forms including high-rises, converted apartment buildings and even some town-homes may be condominiums depending on how they are legally described.  If you’re planning on buying a condo and not paying cash for your purchase, here are a few things to look out for where lenders may have an issue with.

  • Owner occupancy ratio lower than 51%.  Some lenders do not consider listed units and/or second homes as owner occupied which can make reaching the 51% owner occupied a little challenging. NOTE: Some lenders have underwriting overlays that limit the occupancy ratio to 70% owner occupied.
  • Someone owning more than 10% of the units.
  • Delinquent home owner association dues.
  • Inadequate reserves.
  • Retail space in the condominium building.
  • Pending litigation with the Home Owners Association.
  • Amount of FHA loans in a condominium building (if you’re using FHA financing).   

If you would like a mortgage rate quote for a condo or townhome located anywhere in Washington, click here.

HUD recommends that before you sign a purchase agreement, make sure your receive and read a copy of the Declarations, Bylaws, Operating Budget, Management Agreement and other important information.

Currently, conventional financing of a condo has a 0.75% price hit if someone is using less than a 25% down payment or is using a mortgage term amortized longer than 15 years.   FHA currently does not have a price adjustment that impacts mortgage rates for condos but condos must be on their approved list.  If a condo is not on HUD’s approved list and if it meets criteria, it may qualify to be added to the list. There are portfolio lenders who will provide financing for condos, however their mortgage rates tend to be higher since they’re carrying the mortgage.

Here is HUD’s Consumer Fact Sheet for Condominium Projects that I highly recommend you review if you are considering a condo for your next home or investment property.

Something else to keep in mind is that these potential issues may impact you should you decide to refinance your condo or sell your condo in the future.   If your Home Owners Association fails to properly manage your building, or events happen that are out of their control, you may find it challenging to find financing in the future.

Here are a few Seattle area condo blogs to check out:

The Seattle Condo Blog

urbnlivn

Seattle Condo Review

Seattle Condo and Homeowners Association Attorney

UPDATED OCTOBER 18, 2012.

Condo’s Getting Spanked by Fannie

Fannie Mae’s latest hits to rate will be implemented by lenders any day.  Condominiums are really getting spanked with a 0.75% add to fee if there is less than 25% home equity in the property.  This will apply to both purchases and refinances for any mortgage except those amortized 15 years or less.

NOTE: Interest rates quoted are from 2009! If you would like me to provide you with a current mortgage rate quote for a home located anywhere in Washington, click here.

Here’s an example of a rate I just quoted (1/12/2009) based on a value of $330,000 and a loan amount of $264,000 (80% LTV) for a rate term refi 30 year fixed:

Current:  4.875% priced with 1 point (apr 5.013)

Here’s what the 0.75% fee would look like if implemented right now (based on current pricing):

  • 4.875% priced with 1 point plus 0.75% fee.  $1980 more in fee for a loan amount of $264,000.
  • 5.250% priced with 1 point (0.75% fee priced into the rate).  $60 higher in mortgage payment for a loan amount of $264,000.

NOTE: This post was published in 2009 and mortgage rates posted are very outdated. If you would like a current mortgage rate quote for your condo (or any residential property) located anywhere in Washington, please click here.  I’m happy to help!

If you are considering refinancing your condo, contact your local mortgage professional right away (I can help you if you’re located in Washington state)…if you’re in the process of buying a condo and are “floating” your interest rate, I highly recommend considering locking.

PS:  Cash-out refinances are also getting whammo’d by Fannie.  Don’t wait!

Why you should make sure your condo is on the FHA approved list

Approved

Editors Update: Loan limits are different than what’s reflected below from when this article was originally written.  Check with your local FHA approved Mortgage Originator to see what your loan limits are (or click on the link in the second paragraph).  

Please click the links below for current FHA loan limits. 

If your condominium is in a price range that would support FHA financing, you should contact your Home Owners Association to verify that your condominium is indeed on the FHA approved list.  Even if you’re not planning on selling or refinancing anytime soon, if your condo is not on FHA’s list, it can impact the value of your condo.

As of today, the FHA loan limit for the tri-county (King, Pierce and Snohomish) areas for a single unit dwelling is $567,500 $362,790.    If your condo is valued at approximately $650,000 $380,000 or less, it may be attractive to home buyers are utilizing FHA financing.  With fewer programs for first time home buyers, FHA insured mortgages are a popular selection.   If your condo is not approved for FHA financing, you may be limiting qualified buyers.   Fewer home buyers means that the condo that’s for sale in your complex, may not sale for as much as it could have.  This may translate to lower values for all in your condo complex.

Another reason why you should make sure your condo is on the FHA approved list is because you or one of your neighbors may need to use FHA financing to refinance.  As a result of our current mortgage landscape, fewer mortgage programs are available for people who may not have the highest credit scores or who need a mortgage with a higher loan amount.   FHA insured mortgages are not credit score sensitive and will allow up to an 85% 95% loan-to-value for a cash-out refinance at a competitive interest rate.  Not having FHA insured mortgages as an option to you and your neighbors who need to refinance may have damaging long term results such as a short sale or foreclosure if they are heading for financial troubles.  Foreclosed properties also bring down the values of neighboring homes.

Ask your Home Owners Association if your condo is FHA approved.   If your condo has phases; each specific phase is considered and may or may not be approved.   You can also check HUD’s site and contact your local Mortgage Professional to verify whether or not your condo is on the FHA approved list (FHA’s approved condo site can be confusing and easy to assume your condo is approved).

Here are a some of the requirements for condominiums to meet FHA’s guidelines:

  • At least 51% of the total units in the project must be owner occupied.
  • At least 90% of the total units in the project have been sold.
  • No single entity owns more than 10% of the total units in the project.
  • The project, including common areas, is complete with no special assessments and no legal actions pending.
  • The owners association has a reserve plan and a reserve fund , separate from the operating account that is adequate to prevent deferred maintenance.

I recently had a hard working single mom contact me who needed to restructure her debts and wanted to use her mortgage to do so.   Her credit scores were average and a few months ago, I would have been able to provide her several mortgage options.   In today’s market, the only mortgage available for her (excluding hard money) was FHA.

Unfortunately, her condo phase was removed from the approved list due to the reserve account dipping below the amount that was considered “adequate”.  We discovered at the time of the refinance, the reserve account were back to an acceptable amount.   The HOA just needed to have an audit completed in order to be considered back into FHA’s good graces.   FHA does allow “spot” approvals, however, if your condo has been removed from the list, a spot approval is not an option.  Apparently the cost of the audit was approximately $2,000 and the manager of the HOA was in no hurry to accommodate my client or us.

Since the Phase her condo is located is not FHA approved, she cannot proceed with FHA financing which would have saved her $450 per month and would have switched her from an adjustable rate mortgage to a 30 year fixed FHA insured mortgage.

It truly is in your best interest and your neighbors, if your condo is near the FHA loan limits, to make sure your condo phase is on the FHA approved list.   As the process may take weeks to complete, I strongly encourage you to take action now.   Don’t let your HOA be lazy…you may need to rally the support of your neighbors of your condo phase.  It’s well worth it to protect the value of one of your largest investments.

Happy Thanksgiving

Birdseye

On Thanksgiving I think back to a dinner I was making for my entire family in my small condo I had just bought in Des Moines.  I was a fairly new single Mom and my son, who was in Kindergarten, was watching me prepare the feast.  One of the dishes was sauteed pearl onions which called for frozen onions; Birds Eye brand to be exact.  Well after my son watched in horror as I made the turkey dance around the kitchen trying to be funny, he was pretty much transfixed to what I was doing in the kitchen.

Dinner was very cozy in my my small dining-living room.  Everything really turned out nice when suddenly my son let out a huge yelp, “nobody eat the onions, they’re bird’s eyes!”

Every time this year I remember that dinner and just get a huge chuckle. 

Happy Thanksgiving to you and your family!

Mortgage Master is closing at 2 p.m. today and we will reopening for business as usual on Monday, November 26, 2007.   I will not be posting mortgage rates on this Friday.