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If you've ever been hit with a rigorous condo screening process while trying to buy or rent a condo, you may have wondered why condos delve so deeply into personal information. In that case, the condo questionnaire will restore your sense of justice.
Lenders use this document, also known as a condo cert or lender's questionnaire, to screen homeowners associations with the same intensity potential buyers and renters face, and they do it because the federally backed financing sources (Fannie Mae and Freddie Mac) require it. If the condo development does not meet eligibility requirements, then no one can get conventional mortgage financing to buy in that development.
Of course, the huge downside of this for a buyer is that, if the development is ineligible, you likely won't be able to get a government-backed loan for the property, and you will have to pay a larger deposit if you choose to get financing another way.
So, the condo questionnaire requirement does make buying a condo more complicated for all parties -- and potentially means your first choice of loan won't close, through no fault of your own. Of course, if a development is deemed ineligible at a basic level, you might not want to buy there anyway.
The condo questionnaire is much more than just an annoying document that HOAs charge you to fill out at your lender's request. Here's a look at how they work and why they came to exist.
What is the purpose of the condo questionnaire?
Condo units are widely considered riskier for lenders than single-family homes because the value of the unit is affected by the fiscal and physical well-being of the entire development. If other residents have fallen behind on paying their association fees, it affects the fiscal health of the entire community. If a high percentage of nonoccupant owners rent out their units and don't keep up with maintenance, it affects the physical state of the community.
So, the condo questionnaire is a form that either HOAs or association managers are required to fill out upon request from a lender. It provides important information about whether a condo development is "warrantable;" i.e., eligible for Fannie Mae or Freddie Mac financing.
Condo questionnaires used to be written up by lenders, but in 2016, Fannie Mae and Freddie Mac both rolled out Standardized Condominium Project Questionnaires, thereby streamlining and creating consistency in the review process. Some lenders still use their own, but the standardized forms are easy to access and process.
Are there different types of condo reviews?
There are two categories of condo review: limited review and full review.
Limited review has fewer requirements and only a very few deal breakers, most of which any potential homeowner would also consider a major black eye for a community. Limited review establishes a condo association's/development's eligibility for Fannie Mae and Freddie Mac loans.
Full review is much more complicated and stringent, and only a fraction of condominium developments and associations have historically been able to pass. This means that only a small percentage of condo developments are eligible for homebuyers to obtain FHA loans that require only 3.5% to 5% down and offer the lowest rates.
This may be changing, to the benefit of condominium developments and buyers alike, thanks to guidelines released by the Federal Housing Administration in August of 2019. New guidelines allow individual units -- and the would-be buyers -- to be considered for single-unit FHA eligibility on a case-by-case basis, independent of the entire development's certification, as long as fewer than 10% of the units in the complex aren't already FHA-backed. This more lenient regulation is intended to allow more first-time buyers to buy in condo developments.
What is in the condo questionnaire?
Limited review questionnaires are quicker for a condo rep to fill out, and much more likely to be approved. The key requirements are:
- Units and common areas are complete
- No "single investor concentration;" i.e., when one person or business owns more than 10% of units
- A certain percentage of units must be owner-occupied (this percentage varies according to state and buyer's intended usage)
- A "master property insurance" policy
- If the unit is in a flood zone, the complex must have adequate flood insurance
- The development can't operate like a condominium hotel or timeshare
- Control of the HOA must be with the homeowners, not the developer
- An upper threshold of 25% to 35% of the overall square footage zoned for commercial
- The HOA is not part of any ongoing litigation related to safety, habitability, or structural integrity
Full review is typically required for attached units in new construction projects or new conversions where the developer still controls the HOA. The full form is five pages of questions pertaining to:
- Project completion information
- Engineering reports
- Allocation of reserves
- How many units are more than 60 days in arrears on common expense assessments (The upper limit is 15%)
- Ownership of units, and owner/investor activity: Does the development allow short-term rentals?
Additionally, full review requires the association or developer to provide a substantial amount of documentation to review. This may include:
- HOA budget review
- Project construction plans review
- A minimum $1 million policy for Commercial General Liability insurance
- Review of common facilities and common areas
- Review of common expense special assessments
- At least 10% of revenues are set aside for condo reserves
- Review of community covenants and bylaws to ensure Fair Housing Act compliance.
Who can request a condo questionnaire?
A lender requests the condo questionnaire as part of their underwriting due diligence, before deciding whether to approve a loan. That said, the loan officer will share the pertinent details with their client, the would-be buyer. In most cases, they'll also pass the cost of the condo questionnaire to the buyer. This can vary between $100 and $300, although there are rare cases of HOAs asking $500 or more.
It may be possible for the real estate agent to get some basic answers from the listing agent upfront by saying that their client doesn't plan to stray from conventional financing, or only has 10% down, and therefore can only look at a warrantable condo.
What is the significance of the condo questionnaire?
A condo questionnaire, aka lender's questionnaire or condo cert, discloses vital information pertaining to the fiscal and physical wellbeing of the entire development and/or association.
Not all the answers will be important to every buyer. For example, if you're looking to buy in a 100-unit complex, you may not mind that one entity has purchased 11 units and operates them as luxury vacation rentals.
Other factors, however, are not really debatable. If a development is underinsured, or the same HOA that's asking you to pay $800 in monthly fees has not been able to collect them from 50% of other owners so the reserves are dry, that development is a risky place to put your money into, to say nothing of the lender's money.
If you are a buyer, even if the HOA is charging egregious fees (over $300) for processing the limited questionnaire, it is definitely in your best interest to get it and ask for the results, rather than immediately bypassing it and going to an alternative type of loan. Whatever loan you get will require more money down than a government-backed loan, so you're essentially paying more down to live in a community or complex with questionable financials, legal status, and insurance coverage.
Who is responsible for providing information for the condo review process?
The homeowners association or management company is responsible for filling out the condo questionnaire and providing any other documentation about the development that the lender needs as part of the underwriting process.
An important note for people going through this process: If an association makes it very difficult or expensive to obtain a condo questionnaire, it could be indicative of how they'll respond to future requests as well. HOAs or association managers set their own fees for providing this documentation, and they're the ones completing it. If they are using best practices, they'll turn it around immediately and charge little to nothing.
What happens when a condo doesn't meet guidelines?
If a condo doesn't meet guidelines, it is considered non-warrantable and the mortgage is not eligible to be bought by Fannie Mae and Freddie Mac.
You can still get a loan for a non-warrantable condo, but you'll have to search harder for a lender and typically get a nonconforming mortgage such as a portfolio loan. If you live in a small community, you may be able to turn to your local bank or credit union. However, you can expect to pay higher rates and much more for a down payment -- generally around 25%.
Should you base your buying decision on the condo questionnaire?
It depends. Do you have substantial cash reserves? Do you intend this to be an investment property? Are you in love with the unit?
If the answers to the first two questions are no, then, unfortunately, no matter how much you love it, you probably should walk away if it's not Fannie Mae warrantable. FHA is a different story and shouldn't be the determining factor unless you're super confident you can get a spot approval and you really need a 3.5% to 5% down loan.
As a general rule, now that you know how important the condo questionnaire is, make sure and get answers to those key questions on the limited questionnaire before making an offer. If you don't get proactive about asking, no one else is going to do it for you until the underwriting process.
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