Low appraisals and condo associations can trip up mortgages


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As you’re moving along in your homebuying process, you might’ve already gotten preapproved for a mortgage. Maybe you’ve found a home you love and have started taking the steps to buy it. But depending on the home, there might be some setbacks.

If you’re getting ready to buy a home, make sure you’re prepared for possible roadblocks from your property appraisal or condo association. Here’s what you should look out for.

Property appraisal

Sometimes the property is appraised for less than you 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.

Say you intend to borrow $200,000 to buy a $220,000 house. But the appraiser says the house is worth $185,000. The lender isn’t going to give you a $200,000 loan for a house that’s worth $185,000.

If a pending sale starts to fall apart, you have a couple options to consider:

  1. Renegotiate a sale price. Talk to the seller about lowering the price. Sometimes a house was listed higher than it should’ve been. Sellers are usually OK with dropping the cost because if they skipped your offer and went with someone else, there’s a chance another appraiser will give a similar amount.
  2. Come up with a larger down payment. You’ll probably still get a loan, but it might not be as much as you originally wanted. You might have higher monthly payments instead.
  3. Get another appraisal. If you’re hoping to get the appraisal closer to the home price you were expecting, look to getting another appraisal. Find someone with experience with the market and neighborhood you’re looking to buy the home in.

Condominium or townhouse

When you buy a home, your own credit is a major part of determining your creditworthiness. When you buy a condominium or townhouse, credit is also a factor, but so is the state of the entire property.

For a condo or townhome, 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. For townhouses, you might also get a backyard and garage.

Your mortgage lender will want to learn about the complex from a financial and physical standpoint. You’re not just buying a condo or townhouse — you’re also investing in the entire development in which you’ll live in.

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 close attention to these details:

  • Percentage of owner-occupied versus rented units. Most lenders want to see 51 percent or more of the complex owner-occupied.
  • If it’s a new project, at least 70 percent of the units must be sold.
  • Adequate insurance coverage, including hazard insurance.
  • Adequate reserves to cover maintenance and major repairs, such as for roofing and elevators.
  • The homeowners association isn’t named in any lawsuits.

Make sure the seller gives you the condo documents, articles of incorporation, and bylaws of the homeowners association. These should include notification of any ongoing litigation and special assessments.

For extra measure, you may also want to ask for minutes of the homeowners association meetings for the past year. Most states have enacted laws governing the sale of condominiums so check with your state’s division of real estate.

Some mortgages can tie up approvals

If your mortgage is being held up by a low appraisal or a condo association, try to remember your options. In the end, you can use your knowledge to your advantage to make sure your mortgage approval chances stay high.