USDA Purchase Loans for Condo Units

imphot_3Probably the most under-utilized purchase loans for condominium units are those insured by the USDA.  Like the VA and FHA, the USDA Rural Development (RD) program is a home loan insurance that allows the financing of condominium units.

One of the most important criterion for use of this program is that the loans are only available in areas in which the USDA deems to be “rural”.  A rural area is one in which the population is 35,000 or less.  The USDA does not go by towns, it uses census tracts which can allow use of the RD program in part of a town but not the rest.  To know if the condo unit is in an eligible census tract, you can follow this link and click on the Single Family Housing link under Property Eligibility on the left of the page.

The RD program also has maximum income limits for its use and is a computation based on the number of dependents, disabled persons and persons aged 62+ that are living in the household.  The calculation also takes into account the county of the property, annual child care expenses and all income earned by adults in the home (not just the borrowers’ incomes).  You can use the link above and click Single Family Housing under Income Eligibility and use the worksheet to determine eligibility.

Unlike FHA and the VA, the USDA does not maintain its own approved condominiums list.  For a condominium unit to be eligible for RD financing, the project must be on the approved condominiums list of FHA, the VA, Fannie Mae or Freddie Mac.

Where this becomes interesting (at least to me) is when dealing with new construction projects.  FHA, the VA and Fannie/Freddie have different pre-sale requirements for new projects and their calculation.  FHA has the lowest pre-sale only requiring that 30% of the units be sold or pending sale.  Fannie/Freddie have a 50% pre-sale requirement and the VA says that 70% of the total number of units must be sold.

Therefore, for new construction in rural areas, it would make good sense to get approved with FHA to allow the use of the RD program as well.  The USDA does not have a maximum RD loan concentration limit; FHA caps its loan concentration in new projects to 50%.  Thus, after 30% of the units are sold, 50% can be financed with FHA and the rest with the RD program.  This is very important for developers to know when constructing in rural areas.

For more information about USDA’s requirements for condominium projects, you can access the Administrative Notice released by the USDA in 2007.  [The form does need some updating with regards to the pre-sale requirement.  The percentages that are listed above are accurate as of 4/17/15.]

Or you can contact Eric Boucher at

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

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