We have been hearing about clients avoiding condos because they are "impossible" to finance. At least one local agent has been spreading around this rumor. To help us learn more about financing condos, we asked Darel Ansley of Peoples Bank in Wenatchee to set the record straight.
Darel, there are rumors going around Leavenworth that it’s impossible to get financing for a condominium… is this true?
I hear the same thing from a lot of people about condos, land loans and construction as well; it’s not true, but it stems from the mortgage meltdown, where many lenders have shed programs and decided to focus on just their core business. So while it is not impossible, it is true that there are fewer players in the game. Additionally, the rules keep changing, so it’s hard to keep up with what can and can’t be done. My best advice is that if a lender says it can’t be financed, ask a different kind of lender to see if you get the same answer. In our market, we have big banks, community banks, mortgage brokers, and rural lenders who all have different programs. But getting back to condos specifically, it may be surprising to know that for a buyer seeking a primary residence or 2nd home, almost all projects can be financed with minimal money down on a conventional loan at the current low rates. In fact we just financed a condo purchase with 5% down on a 30 yr loan with a rate under 5%; and this was a condo conversion project that isn’t even completely sold out yet.
But it is hard to get some kinds of loans for condos right? Like FHA? What about USDA or VA loans?
For FHA, unfortunately this is true, and always has been. It is costly for a developer to get FHA approval for a project; consequently it is not really cost effective to obtain the approval unless the cost can be spread over a lot of units (like 40+). In our smaller market, we rarely see projects of that size. And without the FHA approval of the project before breaking ground, those units can never be financed by an FHA loan. This is unfortunate, because I think FHA is missing out on fulfilling its mandate. VA typically follows FHA’s policies. As far as USDA, I believe they can accept a Fannie Mae or Freddie Mac approved project, which widens the field, but the general limitation on USDA is finding a Buyer’s income and a property price combination that fits USDAs narrow band.
Some types of condo projects are really hard to finance. Can you describe them?
The difficult ones are those which are considered condo-tels. These are projects, typically in resort towns like Leavenworth or Chelan where they are approved for nightly rental, and they maintain hotel-like services like a reservation desk and room service, a good example is the Aspen Suites at Icicle Village. These cannot be conventionally financed and require down payments of at least 20%, plus higher interest rates.
It is interesting that many lenders have failed to read Fannie Mae’s actual wording about these projects. On one of your Kahler Glen listings a couple years ago, the Buyer’s lender turned down the loan, inaccurately calling the project a condo-tel because they allowed nightly rentals. We financed the purchase with Fannie Mae, because the rule actually states that the existence of nightly rentals alone does not in itself disqualify a project, but nightly rentals with an ‘on-site’ reservation desk is what makes one a condo-tel. So although people may book nightly rentals there through the Kahler Glen clubhouse or Destination Leavenworth, they are independent of the condo project, so we are able to finance those units conventionally.