I. This Is the First Thing Every Agent Should Do Before Listing or Offering on a Condo:
- Make sure the complex/HOA is “warrantable” or approved for financing by Fannie Mae and/or Freddie Mac
If a condo is not warrantable, financing options will be severely limited. Down payments will have to be 20% or more (vs. as little as 3% to 5%), interest rates will be much higher, and values will be lower.
If readers have questions about “warrantability” or any condo complex, please reach out to our Condo Desk at condoteam@jvmlending.com.
We’re happy to help.
II. HOA Issues Are Irrelevant for PUDs/Townhomes
“Warrantability” and/or HOA issues are only a factor for actual condos. HOA issues (like owner occupancy ratios, litigation, ownership concentration, commercial use, budget/reserve problems) are never a factor for PUDs or townhomes.
III. PUD vs. Townhouse vs. Condo
This is another reminder that condos are not distinguishable from PUDs (Planned Unit Development units) by appearance alone.
Attached side-by-side two-story units that all touch the ground can be zoned “CONDO” or “PUD.” Complexes with units that “float” (that do not touch the ground) will almost always be zoned condo (PUDs must touch the ground).
People often refer to PUDs as “townhomes,” but “townhome” is just a style and not a formal zoning designation.
With PUDs, the owner owns the actual lot or ground underneath the unit.
With condos, the owner owns an equal and undivided interest in the entire condo project’s lot (and common areas).
The way to know the actual zoning is to look at the legal description; a PUD will have a separate lot number and/or a small lot size under it, e.g., 2,200 square feet.
A condo will have the same lot number as all the other condos, or NO lot number at all, and/or a very large lot size (such as “11 acres”) under it.
IV. Why the PUD vs. Condo Difference Matters So Much
- Interest Rates. Condo financing comes with higher interest rates whenever the loan-to-value (LTV) ratio is over 75%, and the rate-difference gets larger as the LTV climbs. PUD interest rates are the same as single-family home interest rates.
- VA & FHA. Condos are ineligible for FHA and VA financing unless the entire complex is approved (or unless we can get a “single unit” approval). PUDs are always eligible for both FHA and VA financing.
- HOA Certifications/Condo Considerations/Warrantability. With PUDs, lenders do not need an HOA certification or anything of the sort. With PUDs, lenders also don’t need to worry about all of the restrictions that come with condo financing like owner-occupancy ratios, HOA litigation, concentration rules (prohibiting one owner from owning over 20% of the units), commercial use, etc.
- Appraisals. Appraisers use different forms for condo appraisals vs. PUD appraisals; appraisals are invalid (worthless) if the wrong form is used. This is why lenders and appraisers need to know the correct zoning/designation upfront. I have seen numerous transactions where the wrong type of appraisal was ordered, and the wrong interest rate was quoted because the wrong designation was indicated in the MLS listing or in other documents/information sources.
