Loan Application for Condo Purchase Rejected?

Aug. 24, 2015 — We want to buy a condo, but our bank says they won’t make a loan for that building. Why?

Banks evaluate loans using guidelines supplied by the Federal National Mortgage Association (better known as Fannie Mae). There are three common reasons a building may not qualify under these guidelines. First is the ratio of investor-owned units to primary residence units. Primary residence units are considered lower-risk, as are apartments owned as second homes. Second homes are often incorrectly lumped into the investor percentage. A building’s property manager can perform an analysis to determine an accurate unit ratio.

Another typical issue is the reserve fund. While Fannie Mae requires a 10 percent reserve fund, many banks are willing to accept a lower percentage. We find a reserve study can help the bank evaluate the reserve based on building age, condition, and so on.

The third common issue is insurance coverage. Within bundled insurance policies, it is difficult to assess the coverage for individual properties. A property manager can often supply additional documentation or clarification to address the lender’s objections.

When a building doesn’t meet these or other Fannie Mae criteria, a waiver from Fannie Mae’s Credit Variance Administration System may be requested. Alternatively, another lender may evaluate the loan differently, so it doesn’t necessarily mean that a loan can’t be obtained from a different bank. You should always shop around, and be sure to talk to the manager and the transfer agent about a bank’s specific concerns. There may be an easy resolution.

Mark Motley is senior managing director, owner occupied cooperatives and condominiums, at Rose Associates.