New Condo? Different Rules
Developers creating a brand new condominium project from the ground up or existing structures extensively remodeled have their financing in hand. Their bank decided to finance the developer’s newest, latest project and soon a brand new set of sparkling condominium homes for sale somewhere near Lincoln Park will reach for the sky. At least that’s how the developer sees it. But when you take your clients to look at one of these new condominium properties, note that financing for brand new condos is different compared to a single family home.
With a single family residence under construction, either the builder or the homeowner obtained a construction loan from a bank. When the home is completed, the construction loan is replaced by a permanent mortgage, “end loan.” Pretty easy fare. Not so the new condo.
In the early stages of selling a condominium unit to a private buyer, conventional lenders want to see that at least 70 percent of the units are already pre-sold, waiting to be occupied. Or that before a buyer can get a conventional loan; the developer has transferred all ownership to the Homeowners Association. Brand new projects typically haven’t crossed that threshold. What to do?
There are lenders that finance a project that is not yet ready for conventional status. Not many, but a few. Such loans are often called “portfolio” loans because the lender intends to issue the loan then keep the loan internally; in their portfolio. These loans won’t be as competitive in rate compared to a conventional mortgage and long term fixed rates are usually not part of the mortgage offering with adjustable rate and hybrid loans the norm. Finally, most of these loans require a minimum of 20 percent down. Why is that important to you?
Your buyer may have a preapproval from a lender without the lender knowing about the potential purchase being a brand-new condo project. You can make an offer, get it accepted only to find out a couple of weeks later that the lender declined to approve the loan application due to the nature of the project.
This doesn’t mean a deal-killer for your buyer but it does mean a bit more preparation in terms of finding a lender to place a loan on a new project. Moving into a brand new condo can be fun; just don’t let the financing part of it take you by surprise.