When financing real estate in the Temecula Valley, the property type and HOA structure can make a major difference in the mortgage process, product-type, and even interest rates.
For purposes of this article, we will generally look at four property scenarios:
- Single-Family Residence (SFR) – No HOA
- Attached or Detached Planned Unit Developments (PUDs)
- Detached Condominiums
- Attached Condominiums
The further you move toward an attached condominium, the more detailed the mortgage review can become. Attached and Detached Condo’s can lead a slightly inferior rates and terms for Fannie Mae and Freddie Mac.
1. Single-Family Residence (SFR) – No HOA
For this discussion, we are referring to a traditional single-family residence without an HOA.
This is generally the simplest property type from a mortgage-review standpoint. There is no HOA questionnaire, master insurance review, condo approval process, or complex financial review.
The lender primarily focuses on the borrower, appraisal, title, insurance, and standard mortgage guidelines.
2. Planned Unit Developments (PUDs) and HOA Financing
Attached PUDs
Attached PUDs typically have HOA involvement and may include:
- HOA dues
- CC&Rs
- Master complex insurance
- Shared common areas
Depending on the insurance structure, the homeowner may also need an individual HO-6-type policy covering personal belongings and certain interior portions of the property.
The monthly HOA dues are generally included when calculating the borrower’s housing expense and debt ratios.
From a mortgage standpoint, attached PUDs are often less complicated than attached condominiums, although the lender still needs to verify that the property classification and insurance requirements meet applicable guidelines.
Detached PUDs
A detached PUD often looks very similar to a traditional single-family residence.
In many cases, the mortgage review is also similar. The primary additional consideration is usually the monthly HOA dues & CC&R’s.
The HOA still matters, but the project-level review is generally less extensive than a full attached-condominium review.
3. Detached Condominiums or Site Condo’s
Detached condominiums can also resemble traditional homes.
Paperwork-wise, many can be reviewed similarly to a detached PUD, depending on the project and loan program.
These can include:
- HOA litigation
- Insurance requirements
- HOA financial issues
- Special assessments
The homeowner may also carry their own individual insurance policy when the HOA does not provide full master coverage.
HOA dues must still be included in the debt-ratio calculation.
4. Attached Condominiums: Where It Gets Tricky
Attached condominiums are where the HOA review can become significantly more detailed.
Depending on the loan program, AUS findings, occupancy, loan-to-value ratio, and investor requirements, the lender may complete either:
- A Full Condo Review
- A Limited Condo Review
What Is a Full Condo Review?
A full review generally requires significantly more documentation regarding the entire condominium project.
The lender may request a completed condo questionnaire addressing issues such as:
- Current litigation
- Occupancy percentages
- HOA dues delinquencies
- Financial condition of the HOA
- Insurance coverage
- Structural issues
- Special assessments
- Reserve funding
The lender may also need:
- CC&Rs
- HOA budget or financial statements
- Insurance documentation
- Reserve information or reserve studies, when required
A commonly reviewed delinquency metric is whether more than the allowable percentage of unit owners are seriously delinquent on HOA dues. Ownership concentration may also matter when one person or entity owns a large number of units.
The exact requirements can vary by loan program and investor.
What Is a Limited Condo Review?
A limited condo review is generally less invasive.
It often involves fewer project-level questions and less documentation. Eligibility may depend on factors such as:
- Occupancy
- Loan-to-value ratio
- Down payment
- AUS findings
- Loan program requirements
For Conventional financing, Desktop Underwriter (DU) or Loan Product Advisor (LPA) findings may help determine whether a limited review is available.
In some situations, a condominium project may not meet the requirements for a full review but could still qualify under an available limited-review process.
However, that does not mean every problematic condominium can bypass project requirements.
What Is a Non-Warrantable Condo?
A non-warrantable condominium is generally a project that does not meet standard requirements for financing through Fannie Mae or Freddie Mac.
Possible reasons can include:
- Excessive investor or rental concentration
- Significant litigation
- Financial problems
- Insurance deficiencies
- Commercial or non-residential use
- Ownership concentration
- Structural concerns
- Other project-related issues
A non-warrantable condo does not necessarily mean the property cannot be financed.
It may simply require a specialized mortgage product with different underwriting requirements, down payments, rates, or loan terms.
FHA, VA and Conventional Condo Financing
FHA Condominium Financing
FHA maintains a list of condominium projects that have received FHA approval.
Historically, the project approval process may involve documentation relating to the HOA, finances, insurance, occupancy, and other project requirements.
Once approved, the project is placed on the FHA/HUD Approved Condominium List for a defined approval period.
What Is FHA Spot Approval?
An FHA spot approval can allow an individual unit in an otherwise unapproved condominium project to be reviewed for FHA financing, subject to FHA requirements and project eligibility.
This can be useful when the entire complex does not have current FHA approval. This process can take 45-90 days.
VA Condominium Financing
VA also has condominium project approval requirements and maintains an approved-project resource.
The basic concept is similar: the condominium project must meet VA eligibility requirements before financing can move forward.
An approved project can make the mortgage process considerably easier.
Conventional Condo Financing
Conventional financing through Fannie Mae, Freddie Mac, and certain individual investors may have approved project lists or project eligibility tools that help streamline the review process.
There are generally two major paths:
Full Condo Review
For an owner-occupied transaction, key issues can include:
- Significant litigation within the complex
- Excessive HOA dues delinquency
- Serious financial weakness within the HOA – Poor HOA Finances can lead to higher HOA Dues down the road.
- Balcony and structural Reporting issues coupled with poor net-reserves
For investment-property transactions, additional restrictions can apply, including limits relating to the percentage of units that are investor-owned or rented.
Limited Condo Review
Limited reviews generally involve fewer questions and less documentation.
They are often associated with stronger loan parameters, such as larger down payments, and may be dictated by the AUS findings.
In theory, a complex that struggles with a full review may still qualify under an available limited-review process.
Final Thoughts: You Are Buying Into More Than a Home
When purchasing or refinancing a property with an HOA, read everything and proceed with caution.
And when purchasing an attached condominium, double down on that caution.
You are not just buying the individual property. In many ways, you are buying into:
- The condominium complex
- Your neighbors
- HOA finances
- Reserve funding
- Insurance coverage
- Future special assessments
- Project maintenance
- Litigation risk
I tell my clients:
“You are basically married to the complex.”
The project’s financial and structural metrics can change over time. A property that finances easily today could become more difficult to finance or refinance later if those metrics deteriorate. Thus potentially impacting the marketability of the complex too.
I have also seen challenges arise around Year 9 of newer developments, as owners and HOAs approach important warranty-related deadlines and construction concerns may surface.
In Part Three, we will dig deeper into HOA litigation, reserve studies, California HOA legislation, and federal structural requirements—and why those issues can become extremely important when financing an attached condominium.
