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Financing a Condo Purchase
Aside from the big three: Job, Credit Score and Down Payment, there’s a little more to getting condo financing for your Madison Condo. To begin with, condo financing is somewhat different from financing the purchase of a single family residence in that not only do you have to personally qualify for condo financing… but so does the condo project itself.
Much of the question comes down to whether or not the bank or financial institution can convert your condo financing into what is called a “saleable” loan. For the sake of simplicity, we’ll generalize all financial institutions as “banks.” Banks of course, are not the only type of financial institution that provides home and condo financing. When a bank loans a buyer money to purchase a Madison condo or home, in return it takes a “mortgage” or the promise to pay them back. The bank can then hold the mortgage in house (called a portfolio loan) or they sell it to the secondary market, the latter being the most common process.
Without getting too deep in the weeds, the secondary market is primarily Freddie Mac and Fannie Mae. But Fannie and Freddie are kind of picky about what condo financing they will buy and they establish a rasher of criteria that must be met before they will buy the mortgage from a bank. The problem is, their criteria for condo financing is a bit of a moving target. So, if you want to grease the skids and score good condo financing for your Madison condo, it is a really good idea… make that a GREAT idea… to talk to your bank first and see what the current requirements are for condo financing.
So what do Fannie and Freddie look at to qualify condo financing?
Among other things, they will want to know:
- Is the Madison condo project new or existing or an apartment conversion?
- What percent of the total number of units are sold versus rented or vacant?
- How many of the total number of units are owned by a single entity (like the developer?)
- Has the developer turned the responsibility for management of the condo project over to the owners’ association?
While these criteria remain fairly standard, Fannie and Freddie tend to adjust (read change) the acceptable ratios, which in turn tends to keep the banks on their toes and totally dictates what they can and can not sell to the secondary market.
Now it is important to remember than Fannie and Freddie are typically looking to buy up only conventional condo financing like the legendary 30-year fixed mortgage. If you are definitely looking for the 30-year fixed type of mortgage for your Madison condo, then both you and the condo will have to meet the requirements. (Unless the bank is making an exception for a certain Madison condo project… another good reason to check in with them first.)
But don’t despair mon amie, just because the condo financing you have in mind may not meet the requirements of the secondary market, as a buyer of a Madison condo, you are not necessarily shut out of the game. This is because banks can make portfolio loans that they keep or “service” in house. These are typically some form of adjustable rate mortgage (ARM). And with interest rates as low as they are, you might want to discuss this king of condo financing with your bank.
If you like the terms of the ARM, that may be the right kind of condo financing for you. Alternatively, if the condo project only misses the ratios by a little bit, it might be a good strategy to accept the ARM, then as soon as the ratios meet the requirements for the secondary market, refinance the ARM with a fixed-rate mortgage if that is the condo financing you would ultimately rather have.
Right of First Refusal
Here’s at tip to keep in mind: Occasionally a condo association’s bylaws will include something called a “Right of First Refusal.” In brief, this gives the association the first right to buy your condo in the event you decide to sell, and this right travels right along with the condo every time it is bought and sold. I won’t get into all the reasons they might want to exercise this right, but the key point is that neither Freddie nor Fannie will buy condo financing that has this right included in its association bylaws. No big downtown Madison condo project I know of has this little show stopper in their bylaws, but some of the smaller Madison condo projects in the area may. So be sure to have your broker ask if a Right of First Refusal is squirreled away in the bylaws for the condo you like. Can you still get condo financing in this case? The answer of course is, “Maybe.” It won’t be a saleable mortgage so you will have to look for a bank that will offer you portfolio condo financing. In my experience, when this issues has come up, I can usually refer you to a financial institution that is flexible in this situation.
Hey the good news is: if you are personally qualified and you do your homework, you will most likely find a bank that will be able to structure acceptable condo financing for your condo. But remember, the process will be a whole lot easier if you contact your bank first. Working with your bank and your broker will likely result in the outcome you want: your own Madison Condo.
If you would like to explore a great Madison condo start with the link above and then give me a call at Nelson & Associates Realtors. Whether you are looking for a Downtown Madison Condo, or condos in Fitchburg, Maple Bluff, Monona, Middleton or any of the outlying towns and villages like Verona, Waunakee, McFarland, Mount Horeb, etc., just give me a call and I will be happy to help you not only find a great condo but point you toward several trusted bank references for condo financing to get you under way.