"To Condo or Not to Condo".
That Should Be the Question ...
As a Chicago-area Mortgage Originator, I never try to influence a Buyer as to the type of property they should or should not buy. That's their personal choice ...
But as their Mortgage Originator and advisor, I do try to educate them regarding different property types and the pros and cons associated with each as it pertains to their upcoming mortgage process.
Why?
Because there are some fundamental differences in how differing property types flow through that process. There can also be some differences in costs incurred while moving forward, as well.
When I talk of "differing property types", what exactly do I mean?
Here's my simple explanations:
- Single-Family Residence Detached: No common walls ... a free-standing House
- Single-Family Residence Attached: Examples of this classification are Duplexes and Townhomes with no Associations
- PUD: Planned Unit Development. Can be either of the above classifications (Single-Family Detached or Attached) IF there is a formal recorded Homeowners Association which charges and collects Dues
- Condominium: An Association is in place, the LAND is commonly-owned, the Unit Owner does NOT own the land (only the Unit itself)
Please Note: I did not include "Townhome or Townhouse" in the above. Townhomes/Townhouses are NOT a property classification, rather only a "design or style" of residence.
Perhaps it's the former Residential Appraiser in me, but the buying public and their representatives need to know the impacts of the type of property (legal ownership) being considered for purchase. The fact of the matter is, the classification of property (remember the definitions above) has a "preferred pecking order" in the eyes of mortgage lenders.
What is the implied pecking order? The "ideal" collateral for a Lender is the Single-Family Residence, Detached, with NO Association involved.
Why?
With this type of property: There are the least amount of rules and restrictions to address during processing. Typically, there are also fewer (and fewer ways) for issues to arise during mortgage processing.
The Automated Underwriting Models utilized by Mortgage Lenders assesses the layer of risk involved with the specific property type being purchased by a Borrower. Automated Underwriting also assesses the likelihood or potential for default on a loan.
In other words, Buyers with identical credit, identical income, the same employment, the same down payment, and assets ... but buying differing property types ... MAY reap different results when it comes to an Approval/Acceptance via Automated Underwriting.
Let me provide you an example of the extremes that can be found:
Detached Single-Family Residence
(most preferred)
VS
Condominium
(on the least preferred risk-based collateral)
Depending on the down payment percentage: The CONDO buyer will/may be charged a higher interest rate for their mortgage financing ... OR they may choose to pay higher Closing Costs, as a result of risk-based pricing assessed on a Conventional Loan, per Fannie Mae or Freddie Mac.
To support the existence of this phenomenon, I provide details from two of my most recent Pre-Qualifications. They shed light into my explanations regarding property types.
Scenario #1: A First-Time Home Buyer had entered into a Contract to Buy. She thought (and had been told prior to our consultation together) that she was viewing/purchasing a Townhome. In fact, what she was buying was a Townhome only in style and design.
What she was really viewing and had contracted for was legally a Condominium. The land was commonly owned by the Association, and she as the Unit Owner would not own the land upon purchase as she had thought.
End Result? My Buyer canceled her Contract after learning the facts and figures regarding her Mortgage process and the costs she would pay as a result of buying a Condominium. Her Interest Rate would have been higher due to the Condominium rating.
After discovering the Rules, Regulations, Restrictions associated with the property ... and discovering that there were unpaid Assessments associated with this Unit and Complex ... she changed her mind about moving forward with her purchase. She's presently in the search for another property.
Scenario #2: A past client that purchased a Townhome in a "PUD - Planned Unit Development" years ago, contacted me. He is now looking to sell his Townhome and buy again.
He's looking to purchase a Single-Family Residence (Detached with no Association) for his next home. He's finding that selling his present property has some challenges. By-laws and Declarations associated with his Townhome are impacting the sale and has eliminated some potential and hopeful Buyers from making offers.
As a Result? As he can qualify for a new Mortgage while retaining ownership (and the Mortgage) on his present Townhome, my client has decided to buy his new Single-Family Residence before selling. He's in an enviable position, as many Buyers cannot do this.
The two scenarios above point to a current and vivid reality: The marketplace recognizes differences in property types. Knowing this makes it somewhat easier to understand why Fannie Mae and Freddie Mac do likewise and why they rate property types differently.
My next post will continue with this topic and showcase the impact of Condominium Property type on the pricing of a loan from an Interest Rate and Closing Cost perspective. The info contained within these two posts will help you decide ...
"To Condo or Not to Condo"
* Hoping to Buy or Refinance a home in New Lenox, Will County, or elsewhere in the Chicagoland-area? Contact me! I'll put my 40 years of Mortgage experience hard to work on your behalf.
I'm easily found at:
Gene Mundt
Mortgage Originator - NMLS #216987 - IL Lic. #031.0006220 - WI Lic. 216987
American Portfolio Mortgage Corp.
NMLS #175656
Direct: 815.524.2280
Cell or Text: 708.921.6331
eFax: 815.524.2281
Gene Mundt, Mortgage Originator, an Originator with 40 years of mortgage experience, will offer you exemplary mortgage service and advice when seeking: Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago and the greater Chicagoland region, including: The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, Romeoville, Naperville, etc.), DuPage County, the City of Chicago, Cook County, and elsewhere within IL & WI.
Referrals are Appreciated and Welcomed!
Now I know that a PIN number sounds like a little "boo-boo" easily corrected ... no big deal. But these days? Nothing pertaining to a real estate contract or within the framework of the mortgage process is easily or quickly changed or corrected. Documentation is KING and rules within today's transactions and processes.
