Your Chicago Mortgage Guy

Commercial Space In Your Condo Building – How Much Is Too Much?

There has recently been a lot of talk about the health of individual Condo Associations and Projects, and what constitutes a safe Condominium investment. The Chicago Tribune ran a terrific article a couple of weeks ago about this very topic, and frankly, scared the bejeezus out of a lot of potential buyers and realtors. You can see the article in its original form here. Chicago Tribune - Condo Deals Die Article

This article touches on a number of things, which we are going to cover here over the next week or two, but something I have been running into a lot lately is the way Fannie and Freddie are now viewing Commercial Space in Condo Buildings. If you live in a major city, this could very well affect you.

Fannie Mae, Freddie Mac and FHA have long had guidelines in place that state that a Condominium Project cannot contain more than 20% Commercial Space. So, what constitutes 20% commercial space? Technically it is supposed to be square footage. When a developer has the Declarations written for a building, there is a survey done of the building itself and the square footage that belongs to each individual unit. This is used to determine the amount that each unit pays into the HOA for dues.

Now, picture any four unit condo building on a commercial thoroughfare in Chicago. While it might seem obvious from the street that each unit takes up the same amount of space, and that 100% divided by 4 is 25% each, that isn't usually the case. In most cases, the survey will include parking that may only belong to the residential units, or common space like a roof deck, or a deck above a garage, that only belong to the residential units, that push the percentage of ownership of the commercial space under 20%, thus conforming to Fannie/Freddie/FHA condo guidelines.

When the commercial space still doesn't conform to this 20% threshold, it has long been commonplace to separate the commercial units from the residential Home Owners Association. Until recently if the commercial spaces didn't appear in the declarations and didn't contribute to the HOA, they were not considered part of the residential project and were excluded completely. Recently, Fannie Mae, Freddie Mac and FHA have clarified this issue and this no longer holds true. If you have commercial space in a condominium project, regardless of whether they are part of the residential condo association, that square footage is now factored into the condo approval.

This is not a big deal in our first example, but a very big deal for many existing condo projects. For instance, if you have a 3 unit condominium building on a commercial thoroughfare, you are virtually out of options for financing. Another example would be some older condo conversions with multiple commercial and even multiple levels of commercial space, and no clear declarations stating percentage of ownership, because maybe these units were never part of the association.

So, what are your options then? They aren't good. If you fall between 20%-25%, and the rest of the association is in good shape and you have a strong file in terms of the borrower, there is a good chance you can get an exception through Fannie/Freddie. You can also generally find a portfolio lender that will overlook the percentage of ownership, but at a higher down payment. If you are between 25%-30%, you can apply for an exception, but the higher the percentage of commercial, the less likely you get it approved.

If you are in a property where the percentage of commercial is over 20%, you may want to look at the original survey and see if it is truly reflective of where your current project is. For instance, if a roof deck was added, or common space was added over a garage, they property now has more residential square footage, and the Declarations could potentially be changed. The original survey may also have been done incorrectly and the commercial space, when including common elements belonging to the residential units, may just be incorrect.

If you are in one of these larger buildings where the square footage isn't clear at all, it's best to be prepared when you go into this either with documentation showing the calculated square footage. At the end of the day, it's a judgment call by the appraiser as to exactly what percentage is residential verses commercial, and even they aren't always sure. A single appraiser doesn't always even have the type of access that would be necessary to walk off an entire properties square footage, much less the time or patience to do so in the first place. Remember, these guys are only making a couple hundred bucks to be out there for a very short period of time.

If you have any questions, feel free to reach out to Your Chicago Mortgage Guy!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Pre-Approval!

Here we go again. Every Spring, as the first batch of contracts are signed, I get the calls from either Agents or Borrowers who now under contract, are finding out that they either don't qualify for the mortgage they thought they were going to get, or who are not at all happy with the monthly payment that was just put in front of them.

Admittedly, the Pre-Approval process is flawed. Most people these days start off on the internet. There are mortgage calculators on basically every Real Estate site on the internet. You can research lenders, programs, mortgage terms, all without leaving your cubicle. When your Realtor says you need a pre-approval letter, most people pick up the phone and call either the recommended Loan Officer, or their local bank and ask for a pre-approval for the maximum they can afford. The Loan Officer in turn, generally asks about income, assets, runs a credit report and sends out a very generic letter to a specific purchase price or loan amount. But here's the flaw. Most Loan Officer's never ask how much you are comfortable with on a monthly basis or, if you have looked at your own personal budget to come up with a number that fits. And what happens? You sign that contract for $300,000.00 only to find out the monthly payment eats into the $500 per month you had budgeted for your next vacation or your kid's college fund.

Why are we so afraid to talk about budgets? As a Loan Officer, we are guiding people through the single biggest purchase of their lives. As such, it's the largest monthly liability that they are going to carry. Why are so many mortgage professionals not broaching this with their customers?

The first question I ask a potential borrower when we speak is what they are comfortable with in terms of monthly payment. If they don't know, I ask them to think about that before we start talking about purchase price. It's easy to back into a purchase price range once you have that number and the amount of money being put towards down payment. Here's a dirty little secret. Realtor's don't want to sell you more property than you can afford. Especially considering the state so many of our past clients are in post bubble burst. A good Realtor does not care if they sell you a $200K home instead of a $250K home. What they do care about is getting a referral from you after close. They will not be getting referrals for very long if you are not able to make the monthly payment on the home that you have to live in for the next five years.

Just as important as monthly payment is knowing for sure that you meet current mortgage guidelines. It has never been harder for me to just say to someone, 'Congratulations, you are Pre-approved'. There are just too many things that go into the process now, and too many guidelines to follow. It has never been more important to get a credit check, have a loan officer look at your paystubs, W2's and assets, and even run the file through automated underwriting to make sure the loan will be approved. There are so many things now that can negatively affect the quoted interest rate, that it's imperative to get that out of the way up front. While your best friend may have just locked in 5.00% on a 30 Year Fixed, your particular situation could easily push that rate to 5.500% and change your monthly payment on a $300K loan by as much as $90 per month, before you figure in that your mortgage insurance just got more expensive as well.

So, if you haven't spoken to a loan officer, call one. If you have, but you don't feel like they went through your finances, or talked to you about your comfort level or budget, don't call anyone, call me!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

 

ChicagoAgent Magazine - Ask A Lender

Well, I guess I made the big time!  Here's my article from this month's ChicagoAgent Magazine.  You can also find it here at ChicagoAgent Magazine Online.

Ask A Lender

6 December 2010 No Comment

For this issue’s Ask a Lender, Joe Burke, a vice president of mortgage lending with Guaranteed Rate, answers questions posed by Chicagoland Realtors.

Q: I have spent countless hours and marketing dollars on condominium listings this year, only to find out on more than one deal that the condominium associations are not eligible for conventional mortgages. Is there any way to avoid this?
A: It has long been the norm to prequalify our potential buyers, but the same can’t be said of the properties themselves, and that needs to change. It is the logical next step these days when so many condominium projects are not currently ‘warrantable’ by Fannie Mae and Freddie Mac.

When a mortgage application is taken and the property or collateral is a condominium, the loan application is basically split into two separate underwrites. The first is the borrower package, consisting of income, assets and credit. The second is the condominium package, which is deemed by Fannie Mae and Freddie Mac standards as either warrantable or non-warrantable. If the condominium project is deemed non-warrantable, it is difficult, or even impossible, to obtain financing.

So, how can this be avoided? By prequalifying your client’s condominium association. While there are variances from lender to lender, some are more conservative than others when interpreting guidelines, there are 10 questions that can be asked up front that should give you a reasonable idea if there are going to be any problems that crop up during the mortgage process:

1. Is there a ‘Right of First Refusal’ in the condo declarations?
2. Does the project allow for a buyer to purchase more than one unit with a single mortgage?
3. Is the condo association currently involved in any litigation?
4. Does the project contain any commercial space? If so, what is the square footage?
5. Does any single entity own more than 10 percent of total units in the project?
6. Are more than 15 percent of the total condo units 30 days or more delinquent on their monthly assessments?
7. Is the project a condotel, have a rental desk, daily or weekly rentals?
8. Are there any special assessments currently approved, or have there been any in the past year?
9. If a unit is taken over in foreclosure or “deed-in-lieu,” is the mortgagee responsible for the delinquent HOA dues?
10. Does the budget call for at least 10 percent of the operating cost to be put into a reserve account as a line item in the budget?

Some of these questions can be deal killers if you get a “yes.” Others can be harmless to the transaction with the right documentation. And a few, if apparent up front, can be corrected before the unit ever goes on the MLS. But they will all become a problem during the underwriting process at some point if you don’t ask the questions up front, because the lender will.
As a Realtor, it has never been more important to have a strong relationship with a loan officer, who can help to prequalify your clients’ properties before the MLS. When a challenge presents itself prior to listing, everyone in the transaction can be prepared, the listing can be priced appropriately and potential borrowers can be targeted appropriately.

Q: If my client’s condominium association is deemed “non-warrantable,” are there any financing options available?
A: Yes, Guaranteed Rate has access to lenders that will finance a non-warrantable condominium project, but they won’t necessarily finance any non-warrantable condominium project. For instance, if it’s the owner occupancy that is an issue, there are lenders that will allow financing in the project. They will generally require a higher down payment and have a more limited product array, but are still generally very aggressive when it comes to interest rates.

Joe Burke is a vice president of mortgage Lending at Guaranteed Rate. He has been a loan officer since 2002 with a concentration in first-time condo buyers. He can be reached at 773.742.6707 or joe.burke@guaranteedrate.com.

Property Values - Who won, who lost...

A lot is made of the S&P Case/Schiller Home Price Index these days.  After all, it is supposed to be a snap shot of what is happening with Home Prices across the country.  But that's also the problem, it's a macro, national view of what is happening in terms of Home Values.  So how do you get a better more local picture?  The Chicago Tribune has an awesome online tool where you can see who won and lost. 

Chicago Tribune Median Price Heat Map

Take a look and you might be pleasantly, or possibly unpleasantly, surprised.  Remember, Real Estate is local, not National.  Traditionally, Chicago and Midwest housing prices have held up very well throughout good and bad times.  I predict that over the next five years, we will also fair better than the majority of the country.  

Joe Burke

Your Chicago Mortgage Guy

Joe@yourchicagomortgageguy.com

773-742-6707