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Risky Condo Refinance

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Posted On: 08/29/2012

ANSWER:

Fannie Mae and Freddie Mac want condominium projects to meet certain standards before they will buy loans secured by such projects. They want to know the percentage of investor-owned units. They want to be sure that the units are not hotel/resort projects, timeshares or houseboats.

Why the restrictions? All real estate may look somewhat the same in terms of bricks and mortar, but different types of ownership result carry different amounts of risk for the mortgage lender.

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With a “fee simple” home, you own a complete “bundle of rights” and can finance the property any way you like and paint it any color. There’s no requirement to join a homeowners’ association or to live by their rules. If your neighbor is foreclosed, that does not mean your mortgage will be unpaid.

With a condominium, you own your unit and have an interest in common areas such as parking lots and pools. There’s a condo association to operate the property, and you must pay a condo fee. Those who don’t pay the fee can be foreclosed. If a lot of owners don’t pay the fee, then the entire property could decline, meaning more risk for mortgage lenders.

For instance, Fannie Mae and Freddie Mac will not buy mortgages if too many units in one project are investor-owned, so they set rental restrictions. And, they may not buy if the developer continues to own too many units.

Without Fannie Mae or Freddie Mac approval, when it comes time to sell, your buyer may need more money down. That will make your unit less desirable and push down the value.

For specifics, speak with your homeowners’ association or developer and see if it’s possible to obtain Fannie Mae or Freddie Mac approval.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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