Pre-Approval For The Buyer Isn't Enough: Have You Vetted the Co-op or Condo Project?

One critical aspect that often goes overlooked by buyers, sellers, and even some agents is the importance of securing a lender that is not only willing to approve the borrower but also the specific co-op or condo project they are buying in. Whether you're buying or selling, understanding this dual approval process is important when negotiating terms and assessing risk variables in a transaction.

I wrangled up some of my trusted lending resources and put together a panel of seasoned mortgage brokers to include their perspective and insights on the topic.? Thank you to Adam Turkewitz of Cliffco Mortgage Bankers, Erik Johnson of CrossCountry Mortgage, Anthony Nigrelli of Movement Mortgage, and Stephen Lascher of Wells Fargo Bank for participating and for their input.

Understanding the Dual Approval Process

When purchasing a co-op or condo, it's essential to recognize that the approval process involves two key components: the borrower and the property itself. While many buyers focus on getting pre-approved for a mortgage, they may overlook the fact that not all lenders are willing to finance every co-op or condo project. This can lead to unexpected delays or even jeopardize the transaction.

Why Project Approval Matters

Lenders have specific criteria for approving co-op and condo projects. These criteria can include the financial health of the building, the percentage of owner-occupied units, and any pending litigation against the building. If a project doesn't meet a lender's requirements, the loan may not be approved, regardless of the borrower's financial standing.

Common Reasons for Lender Rejection of Co-op or Condo Projects

Local Law Compliance: One of the most prevalent issues is non-compliance with Local Laws 11 and 126. Local Law 11 pertains to the building's fa?ade, while Local Law 126 addresses the parking structure. Projects that receive an "UNSAFE" rating from the New York City Department of Buildings (DOB) due to non-compliance present significant risks. Lenders, especially those underwriting to Fannie Mae and Freddie Mac standards, may be hesitant to approve loans for such projects.

Insurance Deductibles: Another emerging challenge is the increase in insurance deductibles. For a project to be warrantable, the deductible should not exceed 5%. However, many projects are raising their deductibles to 7.5% or even 10% to offset rising insurance costs, which can deter lenders.

Financial and Legal Concerns: Projects may also face rejection due to high delinquency rates, insufficient reserves, and pending litigation. Additionally, issues such as a high concentration of sponsor-owned or investor units can raise red flags for lenders.

Preparing Properties to Meet Lender Requirements

By understanding and addressing these concerns early, sellers can help determine which type of mortgage contingency might be acceptable and spot any challenges with certain lenders.

Collaborating with listing agents and management companies to create a file of critical documents such as the bank questionnaire, safety addendum, financial statements, budget, and insurance details can be invaluable. Having these documents ready helps to identify lenders who have already vetted the project, reducing the time needed for mortgage processing. This preparation can save weeks in the mortgage approval process.

Advice for Buyers Considering a Purchase in Buildings with Financial or Legal Challenges

Conduct Thorough Due Diligence: Buyers should gather as much information as possible to make an informed decision. This includes consulting with experienced professionals such as real estate agents, mortgage brokers, and real estate attorneys to fully understand the implications of the building's challenges.

Evaluate Risks Carefully: It's crucial for buyers to weigh the risks associated with the building. Just because a lender deems a risk acceptable doesn't mean the buyer should automatically proceed. Buyers need to assess their own risk tolerance and how potential issues might impact their investment.

Explore Alternative Financing Options: In some cases, exploring alternative financing options or negotiating contingencies may be necessary. Buyers should be open to different financing structures that might better accommodate the building's challenges.

Utilize ACRIS for Recent Financing Data: Checking the Automated City Register Information System (ACRIS) can provide insights into which lenders have recently financed units in the building. Focus on data from the past 3 to 6 months, as older information may be outdated.

Engage Lenders Early: Have a lender review the building before signing contracts. This proactive step can expedite the process once the building is approved. Buyers should check with their lender about how the terms of financing might be impacted by the specific issues presented in the project.

Lenders and Loan Products for Co-op and Condo Projects with Approval Challenges

Portfolio Lenders and Balance Sheet Funding: Banks that can fund loans on their balance sheet, without adhering to Fannie Mae or Freddie Mac guidelines, typically offer more accommodating solutions for projects with approval challenges. These lenders have the discretion to consider the unique aspects of each co-op or condo, providing more tailored financing options.

Adjustable Rate Mortgages (ARMs) and Interest-Only Payments: Many co-ops are open to financing options such as Adjustable Rate Mortgages (ARMs) and interest-only payments. These products offer flexible terms that can be better suited to the financial profiles of certain buildings, making them viable options for projects with specific challenges.

NYS Bond Program and SONYMA: Programs like the New York State (NYS) bond program and the State of New York Mortgage Agency (SONYMA) offer more options compared to traditional lenders. These programs provide down payment assistance for qualified buyers and conduct building reviews prior to loan submission, enhancing the likelihood of approval.

Non-Agency Lending Options: Mortgage brokers with access to non-agency lending options can offer solutions that do not rely on agency guidelines. These options can be particularly useful for projects facing approval challenges, as they provide more flexibility in terms of underwriting and loan structuring.

Thank you for reading. Over the past year, many of my colleagues have faced this issue more frequently while helping their clients. It's an important topic to consider if you're thinking about buying or selling a co-op or condo soon. I hope you found the information useful, and as always, feel free to reach out if you have any questions or need further assistance with your real estate needs.

#RealEstate #HomeBuying #SellingYourHome #NYCRealestate #Co-opForSale #CondoForSale #RealEstateEducation #ExperienceMatters #NYCRealEstateAgent

Adam W. Turkewitz Erik Johnson Anthony Nigrelli Stephen Lascher