Navigating the Condo Lending Minefield

When deciding whether to lend money to potential buyers or to unit-owners who want to refinance their mortgage in a condominium, lenders follow guide-lines issued by federally backed Fannie Mae and Freddie Mac. These guidelines can seem like a minefield, but some pitfalls can be avoided if condo boards understand them and take steps to circumvent them. Here are some of the big ones:

Owner-concentration thresholds. In condominiums with more than 20 units, boards should not allow an individual or a single entity to own more than 25 percent of the units; in condominiums with 5 to 20 units, no more than 2 units; and in condominiums with 4 or fewer units, no more than 1 unit. Developer-owned vacant units for sale do not count toward the threshold, but occupied unsold units do.

Owner-occupancy thresholds. Boards should ensure that at least 50 percent of the units are owner-occupied. To be considered owner-occupied, a unit must be the owner’s primary residence or a secondary home, rather than an investment property, such as a rental. Boards should track owner-occupancy rates and reject rental applications if the 50 percent threshold will be crossed.

Budget requirements. With the exception of condominiums with four units or fewer, boards must ensure that their budgets include the following: appropriate assessments to man-age the condominium; appropriate allocations for line items; adequate funding for insurance deductibles; and a line item of at least 10 percent of the budget for replacement of reserves. The cost of these expenditures should be based either on a reserve study or on the condominium’s age and the estimated life and replacement cost of the major common elements.

Unpaid common charges. In established condominiums, no more than 25 percent of the units may be delinquent in the payment of common charges. In new condominiums, the threshold is 15 percent. No delinquency is allowed in condominiums with 4 or fewer units.