If you own a condominium and want to
refinance your mortgage
, you'll need to meet two sets of loan guidelines: one that applies
to you and another that applies to your condo owners'
The rules for you are essentially the same regardless of the
property type, but the rules for your association can create issues
when refinancing your loan, says Joe Metzler, a mortgage specialist
with Mortgages Unlimited in St. Paul, Minn.
The first issue is whether your
has been approved for conventional (Fannie Mae or Freddie Mac) or
FHA financing. Approval is required because your association is
essentially a third-party involved in refinancing your loan and
that involvement adds "an additional element of risk" for the
lender, Metzler explains.
If it is approved, your condo refinance can go forward. If not,
you'll probably need to get approval before you can proceed. The
process is "actually fairly easy," Metzler says, if, that is, your
association's financials are in OK shape and your neighbors don't
include legions of foreclosures or non-owner occupied rental units.
If not, approval could be difficult or impossible, which would
derail your condo refinance.
The lender also will require a so-called condominium
questionnaire. The most important questions typically concern the
percentage of owners who occupy their units, association reserve
accounts and whether the association is involved in any litigation,
according to Justin Lopatin, vice president of mortgage lending at
PERL Mortgage in Chicago, Ill.
"Most of the time, there needs to be over 51 percent
owner-occupancy in the building," Lopatin explains. "If there is a
shortage of reserves or, typically, 15 percent of the unit owners
are past due on their association dues or assessment fees, that can
be a hindrance."
FHA recently relaxed its guidelines
to allow up to 15 percent of the owners to be 60 or more days
delinquent. Previously, the guidelines used a 30-day threshold.
Another issue concerns how much equity you have in your condo.
Equity is a function of your loan amount and the value of your
property, and is usually determined by some form of an appraisal.
An appraisal can prove problematic if condos similar to yours were
sold within the last six months at prices that don't support your
"Historically, we've always had three comparables on an
appraisal," Metzler explains. "Today, you see four or five a lot.
But when you're doing (a loan for a property) in an association,
you have to pull the majority of the comps out of that same
That means the appraiser will have to use at least two or three
comps in your complex to determine the value of your
, even if other similar condos sold for higher prices nearby. If no
useable comps exist in your complex, the appraiser will have to
justify why other comps were used.
The HARP option
One way to skirt around the condo association and appraisal
issues is to refinance through the Home Affordable Refinance
Program (HARP), which can be used if you have a conventional loan,
occupy your condo as your principal residence and your
loan-to-value ratio is at least 80 percent.
"HARP says, 'We don't care about the status of the association,'
which is nice because you don't have to go through all the
rigmarole," Metzler says. "It's pretty much clear to go."
If you've moved out of your condo, the rules change because, as
Lopatin explains, your loan will be considered an investment
refinance. That means your interest rate likely will be higher and
you'll need at least 20 percent equity to refinance. Equity is a
must because mortgage insurance generally isn't an option for
If you're short of equity, you can do what's known as a cash-in
refinance, in which you bring cash to closing to boost your equity
to the 20 percent level.
"It may make sense to take $10,000 or $20,000 out of your
savings -- from one pocket, so to speak, to another -- to increase
the cash flow and make that investment property more profitable,"
Lopatin says. "That's a great strategy if it's within reach and you
have the liquidity. Not everybody does."
The bottom line is that a condo refinance involves a lot of
moving parts, but you might be able to pull it off if you and your
association meet the guidelines.