Condo Unit Financing Almost Killed Due to Reserve Contribution

gstockstudioLast week a loan officer contacted me regarding a loan he had in  process.  At the 11th hour, the lender was rejecting the conventional (Fannie Mae) loan based on the association’s contribution to the reserve account.  According to the underwriter, the association was contributing less than 10% to the reserve account; the contribution was $6,400 short by their calculations.

He asked for my input.

After reviewing a copy of the budget, I wrote down some points for my friend to bring to the attention of the underwriter.

The first of which was that the underwriter was calculating the percentage using the total amount of annual income.  This included a line item called “Rollover from 2014”.  This is not actual income to the association; it is a transfer of equity funds from the operating account consisting of accumulated funds from previous years.  Thus, it should be removed from the calculation.

In addition, there was income listed from the rental of an office space and of storage units.  These are not common charges and should also be removed from the calculation.

There is a special assessment called a “Garage Fee” listed as income and an expense of the same amount labeled as “Garage Reserves”.  The underwriter was using the income in the calculation but was not including the expense towards Garage Reserves citing that those funds “spoken for”.

I posed that special assessment funds are not to be included in the calculation unless they are charges to specific unit owners that are common every year.  And, if the income is to be included, so should the Garage Reserves contribution because it is going into a fund that will pay for the replacement/repairs of the garages, aka, common elements.

After forwarding my rebuttal to the underwriter, my friend replied that the lender had done an “about-face” and approved the condo’s budget.

This loan almost didn’t happen because the underwriter was not completely familiar with Fannie Mae’s guidelines.  How many other loans have been errantly rejected for this same reason?

Top Photo Credit: (c) Can Stock Photo / gstockstudio

Fannie Mae Reintroduces 97% Financing for Condominium Units

Last week Fannie Mae announced the reintroduction of 97% financing for single-family homes, PUD units and condominium units.  This program would compete directly with FHA 96.5% financing…or will it?

From our experience, when Fannie Mae previously offered a 97% loan product, it wasn’t widely used.  This is primarily because the monthly mortgage insurance (MI) was so high.  Fannie Mae requires 35% insurance coverage on loans greater than 95% loan-to-value.  Depending on the borrower’s credit score, this can be very expensive.

The table, below, provides figures for three different loan scenarios: Fannie Mae 97% with a 660 credit score, Fannie Mae 97% with a 720 credit score and FHA (monthly MI not impacted by credit score).

Fannie Mae 97%
720 credit
Fannie Mae 97%
660 Credit
FHA 96.5%
Purchase Price $150,000 $150,000 $150,000
Down Payment $4,500 $4,500 $5250
UFMIP* $2,533
Total Loan Amount $145,500 $145,500 $147,283
Monthly MI $133 $179 $98
*Up Front Mortgage Insurance Premium of 1.75% charged on all FHA loans; often added to the loan amount.

The other contributing factor to the monthly payment is the increase in the loan’s interest rate.  97% poses more risk as do lower credit scores and Fannie Mae requires loan-level pricing adjustments which effectively increase the borrower’s interest rate.

Often we hear that condominiums don’t want to get FHA-approved because they don’t want “those people” moving in.  Typically, this comment is in reference to low-downpayment buyers.  Essentially, Fannie Mae has just opened the door for “those people” by offering a similar product, albeit one that is more expensive.

Now, even if associations opt to not get approved with FHA, the same 3%-downpayment buyers have the ability to purchase units, but with much higher monthly payments.  By not being approved with FHA, it forces these buyers to use a more expensive loan product.

Note:  97% loans in the State of Florida must be approved through Fannie Mae’s automated underwriting system and require full project approval of the lender or Fannie Mae through PERS for existing projects; PERS approval is required for loans in new and newly-converted projects.

97% Financing – Fannie Mae Releases Selling Guide 1.27.15

AndreyPopovFannie Mae released its updated version of the Selling Guide on January 27, 2015.  The majority of the changes stem from its earlier announcement to reintroduce 97% financing for single-family homes.  It had previously capped the loan-to-value ratio at 95% for most of its programs.

According to the Selling Guide, to be eligible for 97% purchase financing, borrowers must be first time homebuyers (or haven’t owned a home in the past 3 years), purchasing a single-family dwelling (not a manufactured home) and it must be approved by its automated underwriting system Desktop Underwriter (DU).  DU will determine the borrower’s reserve requirements* (see below).  All other standard Fannie Mae loan eligibility requirements still apply.

Loans of up to 97% loan-to-value are also available for refinancing single-family, primary residence, existing Fannie Mae loans (not manufactured homes).  This LTV is only available for limited cash-out refinance transactions and must be approved by DU.

97% financing will also be allowed to finance condominium units…even in Florida.  However, in Florida, the condominium project must be approved through Fannie’s PERS system and the loan must be approved by DU.

Fannie also updated its policy regarding first-time buyer education courses to include the requirement for all My Community Mortgages with 97% LTVs.

The mortgage insurance coverage requirements are the same as they used to be when Fannie offered 97% financing: 35% coverage or 18% coverage for My Community Mortgages.  Fannie also will accept a minimum coverage of 18% but applies a loan-level pricing adjustment to the interest rate.

There are varied opinions regarding the re-introduction of 97% financing by Fannie Mae.  Many will say that it was programs like this that led to the housing collapse 8 years ago.  While others argue that the housing industry is again ready to sustain these programs now that the economy is getting back on its feet.

I think that any mortgage loan programs that assist responsible home purchasers to achieve their dream of homeownership are a good thing.

*Reserve requirement: “reserves” is the amount of assets a borrower has following the closing of a mortgage loan.  Often, it will be required that borrowers have available to them sufficient funds after the closing to be able to make several months of mortgage payments.

Top Photo Credit: (c) Can Stock Photo / Andrey Popov