You own a condominium and want to refinance it. You know your finances are in order and you even consider your credit score and debt ratio excellent. You just know you will not have a problem refinancing your condominium. This all changes when you sit down with a lender, though. You find out that the development where you live has what they call low owner occupancy. This translates into a non-warrantable condominium. In other words, you are not eligible for financing through standard methods. Where does this leave you? The good news is that you have options – you just have to be creative.
Why Does Low Owner Occupancy Matter?
The first thing to understand is why low owner occupancy matters. What does it even mean? Fannie Mae, Freddie Mac, the FHA, and the VA all look at condominium developments as a whole. You don’t own the entire development. You only own the interior of your individual unit. The remaining property is community owned. This means everyone else in the development has a bearing on the value of your property. This includes not only the other owners, but the association as well. The association is in charge of the common areas as well as the financials for the development.
Looking at owner occupancy, the government agencies who back mortgages want to know that at least half of the properties are owner-occupied. This means the people who own them live in the property. Historically, owner occupied properties are less likely to go into foreclosure than investment properties. It makes sense since many people would do what they could to save the home they lived in, but if they owned an investment property and had financial trouble, they would likely let it go. This poses a higher risk to the bank, which is why the government agencies require at least 51% of the properties to be owner occupied.
What Makes a Condo Non-Warrantable?
When you cannot secure conforming or government-backed financing for a condominium, it is probably considered non-warrantable. This means it does not meet the standard guidelines for a condominium association. Among those guidelines include:
- One owner cannot own more than 10% of the properties in the development
- 51% or more of the properties must be owner-occupied
- 85% of the units must be on-time with their association dues
- There cannot be any legal action taken against the HOA
- No more than 25% of the development is used for commercial purposes
If your development does not meet any of the above stipulations, it is non-warrantable and you cannot secure standard financing.
Are you Out of Luck?
The good news is that there are other options. If you want to refinance your condominium and you know you are in good standing, you may find a lender that does not offer standard financing. This means a lender who participates in portfolio lending. These lenders keep the loan on their own books. The rules they set are the only rules you have to follow. You may find a few lenders who sell their loans to private investors as well, but these are few and far between.
The good news is that you can find these lenders in various places. Whether you search online or look within your local community. Target your smaller or private banks to see if they participate in portfolio lending. Many banks don’t advertise this fact, but do offer it.
Qualifying for a Portfolio Loan
If you have to go the portfolio loan route, you probably want to know how to qualify for it. There are no written rules as there is for conforming, FHA, and VA loans. Each bank creates their own rules. In order to maximize your chances of approval, though, you can do the following:
- Improve your credit score. The higher your score, the more likely you are to gain approval. You don’t need “great” credit, but you should have a score that shows financial responsibility. Aim for a score of at least 650, or higher if you can.
- Pay down your debts. The fewer debts you have, the lower your debt ratio becomes. This lowers the risk to the lender. The fewer debts you have, the more focus you can put on making your mortgage payments on time. The lender looks favorably upon this.
- Get your documents in order. To apply for the refinance, you will need to provide the portfolio lender with the same type of documents as you would for any other loan. Find your most recent paystubs, last 2 W-2s, and most recent bank statements. If you own your own company or earn commission, you might need to provide your tax returns for the last 2 years as well.
Most importantly, make sure you always make your mortgage payments on time. Even though you want to refinance, you cannot stop making your current mortgage payments. It is not until the new lender pays off your original mortgage that you can stop making those payments. Up until that time, continue to make those payments in order to keep your credit score up as well as keep your housing history in a positive light.
It is not possible to refinance a condominium within a development with low owner occupancy, but you may have to search a little harder. There are plenty of portfolio banks out there who are willing to provide you with a loan, but you have to ask. If, however, your association has legal action against them or a large percentage of homeowners defaulted on their association dues, you might not be able to refinance. Find out the status of everything involved with your development before you try to refinance. This can save you the headaches involved with a loan denial and can help you figure out what you need to do to improve the situation. Sometimes it just requires you to wait a little longer until things settle down. Owner occupancy, however, should not deter you from refinancing.