Profile picture for user7341666

Changes to locked rate for a condo

We are getting a loan for a condo. The bank just informed us that the condo review uncovered that the association has lowered the amount it is collecting in reserves this year to 8.3% vs. 10% required by Freddie Mac and that because of that our rate will have to increase. Our closing is scheduled for 10 days from now. This sounds like some sort of trick. Is it? What are our options?
  • July 01 2013 - Chicago
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Answers (6)

Profile picture for Matt Laricy
I would see if there is a way to get them to go back up to 10% in reserves. Also, if the rules change, and you have to get a different loan, you may have to get a new rate. Were you only putting 5% down? If so, this could be the reason. It opens it up to a full condo review. You could put 10% down and then wave this completely.
  • July 01 2013
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It's not a trick that the association you are buying in doesn't have adequate reserves for a full review of the HOA with 5% down, per Fannie/Freddie guidelines. Full reviews are required if you have 5% down. If you put 10% down, then only a limited (abbreviated) review is required. It seems that your broker may be placing you with another lender that allows for less than 10% reserves and less than 10% down. The rate may not be as competitive as with a Fannie/Freddie loan.

This is one of the few guidelines, in my humble opinion, that actually protects the borrower as well. As a homeowner, you must always look at the financial health of the condo association, since it's in your best interest as well. You wouldn't want an association to fall short on their repair/maintenance budget, right? Chicago has some challenging HOA's and I see them all the time.
  • July 01 2013
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Profile picture for user7341666
Thank you. We are actually putting 40% down. It is an investment property. This is the first year the association has lowered the % below 10%. Would the fact that t is an an investment property be the reason?
  • July 02 2013
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The fact that your lender can even finance the property is a positive.    I agree with Matt, try work with the association to get a budget that sows 10% reserves.   

Condo's are either Warrantable (approved by Fannie/Freddie), or require a Spot-Approval.  Most larger lenders will allow spot approvals, but must carefully follow the guidelines or the loan might be excluded from securitization.   Financing un-warrantable condos normally requires different guidelines/program.   

One option I've used in the past is that if the association already has substantial reserves, they might not be collecting 10% of the current HOA fee monthly, but if you can combine the money 'on-hand' with the budgeted reserves, it might qualify.
  • July 02 2013
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Profile picture for user7341666
Thank you, Steve. Does this apply to all condo or investment condos?
  • July 02 2013
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This is all condos.

Although the eligibility for 'warrantability' (or spot approval) is impacted by the total percentage of Rental units in the association.  I would expect that if your purchase qualified with 10% reserves there should be no guideline difference between Owner Occupied or Investment.
  • July 02 2013
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