Low appraisals and condo associations can trip up mortgages
Some homebuyers fall into a gray area that will cause a lender to reject the loan, require additional information to approve it or modify the terms.
Sometimes the property is appraised for less than you have agreed to pay for it. This can create problems, especially if your down payment is small and the appraised value falls below the amount you want to borrow.
If the appraisal falls short of the loan amount, you might have to come up with a larger down payment or renegotiate the sale price before the lender will lend you the money at all. Say you intend to borrow $97,000 to buy a $100,000 house. But the appraiser says the house is worth $95,000. The lender isn't going to give you a $97,000 loan for a house that's worth $95,000.
Either you will have to negotiate a lower price for the house, or you will have to pay the original price but come up with a bigger down payment and borrow less than $95,000.
Condominium or town house
When you buy a condominium or town house, as opposed to a single-family detached home, you generally receive exclusive ownership of the interior space of your unit and joint ownership of the common areas (walls, grounds, fences, facilities) with the other owners in the complex. In the case of a town house, you might also own a backyard and garage.
Your mortgage lender will want to investigate the complex from a financial and physical standpoint to avoid making a loan on a troubled condominium. Most lenders have a questionnaire that the condo association can complete to help the lender analyze the project and decide whether it is acceptable collateral for a loan. The lender will pay particular attention to these details:
- Percentage of owner-occupied versus rented units. Most lenders want to see 60 percent or more of the complex owner-occupied.
- Is the construction finished? Most lenders require that it be at least 90 percent complete.
- Adequate insurance coverage, including hazard insurance.
- Acceptable operating budget.
- Competent management.
- Adequate reserves to cover maintenance and major repairs, such as for roofing and elevators.
Make sure you receive from the seller the condo documents, articles of incorporation and bylaws of the homeowners association. These should include notification of any ongoing litigation and special assessments. You may also want to ask for minutes of the homeowners association meetings for the past year. Read the condo documentation carefully and make your approval a condition of the purchase. Most states have enacted laws governing the sale of condominiums; check with your state's division of real estate.