The residential mortgage industry recognizes three categories of residences: single family homes (SFR), planned unit development (PUD but often referred to as townhomes) and condominiums (condo). Both the SFR and the PUD are forms of ownership wherein the homeowner owns the underlying land as well as the improvements. PUDs are typically located close together in small developments of two or more and may or may not have common walls.
A homeowner with a condo owns just the unit itself and not the underlying land. The land is owned collectively by the Home Owner's Association (HOA), which is made up of all of the homeowners in the condominium development. Condominium developments can be made up of as few as two units or up to hundreds of units and are often stacked on top of each other.
Condos represent a higher risk (than single family residences and PUDs) to lenders for several reasons. In fact, FHA believes the risk is so great that it maintains an approved condo project list and FHA will not loan on a condo unless it is on that list. Send me an email for a copy of the approved condo projects in Santa Cruz County. Condominiums are typically the most affordable type of homeownership of the three types of housing and consequently have remained popular here.
In order to maintain the landscaping, roofs, walkways and exterior siding, condo owners as well as PUD owners are expected to pay monthly dues, referred to as Home Owner Association (HOA) dues. In Santa Cruz County these can exceed $400 per month but may also include garbage, water and sewer charges. Homeowners must pay their dues or the property can be taken away from them according to the Covenants, Conditions, and Restrictions (CCRs).
Condo associations can be plagued by lawsuits that have been filed against the builders for defective construction. Once the HOA files a lawsuit, obtaining financing and, consequently, finding buyers, can be difficult. Lenders do not want to lend on a project in litigation.
When condo developments become overloaded with tenants, rather than homeowners, the care evident in owner-occupied homes is seriously diluted. When this happens, maintenance may go downhill, rents go down, and values can fall. For these and other reasons, lenders may not loan on a unit in a condo development that is not at least 51 percent owner-occupied; however, there are exceptions. Additionally, HOA budgets must meet guidelines, the delinquency factor on the HOA dues must not exceed 15 percent, fidelity bond coverage is required for projects with over 20 units and no one entity can own more than 10 percent of the units in any one development. When a homebuyer plans to buy a condominium, lenders will typically ask the HOA to fill out a form that addresses these concerns and will scrutinize documents relating to the project.
While the typical homeowner's insurance insures the homeowner for fire and liability, it is the HOA that provides insurance for the condominium owner and is paid through the HOA dues. However, mortgage lenders are now requiring condo owners to carry a separate insurance policy that protects the homeowner's interior of the unit. This insurance is called "walls in" insurance.
Local mortgage consultant Peter Boutell has been writing a weekly column for the Sentinel since 1995. Send questions to 'Lending a Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062, fax them to 425-1044 or email them to email@example.com. Archived columns are available at www.peterboutell.com.