Buyers and sellers: new lending guidelines (and what to do about them)

It's all for safety's sake...and money, of course. You probably recall the horrific Champlain Towers South building collapse in Surfside, Florida. Nobody wants to live in or buy unsafe housing. And now, lenders do not want to risk their money to finance purchases of risky properties.

Fannie Mae and Freddie guaranty about 70% of all residential mortgages in America. They want to ensure those loan guarantees do not collapse, too (pun intended). So, they have shifted the onus of confirming building (and loan) safety from home-owners and homeowner's associations (HOAs) to loan originators—aka the buyer's lender. The agencies expect loan originators to take back bad loans made into unsafe properties. These companies are in the business of making loans, not buying them back.

So lenders really have no choice. They must confirm condos and co-op buildings with five or more attached units are safe, structurally sound, and habitable. We expect that most loan originators will treat two- four unit buildings in like manner.

It is all about Safety, Soundness, Structural Integrity, and Habitability (SSIH). With the new guidelines, lenders must confirm that:

• Buildings are not on their "do-not-lend" lists.
• No critical repairs are necessary.
• Unfunded repair costs do not exceed $10,000 per unit.
• There are no pending evacuation orders due to unsafe conditions.

Lenders must complete a questionnaire that asks:

• Whether the association is aware of any such SSIH deficiency.
• Whether there are any open or anticipated building code violations.
• When the last building was last inspected by a licensed architect, engineer, or any other building inspector.
• Whether the last inspection made any SSIH findings.
• Whether a reserve study has been prepared in the last 3 years.
• Whether the association has a funding plan for deferred maintenance.
• Whether there is a schedule for the deferred maintenance.
• What current reserve account balances exist.
• Whether there are any planned or pending special assessments.
• Whether they are any planned or pending loans to finance repairs.

In evaluating properties, lenders must:

• Review all structural and mechanical inspection reports completed within the most recent three years.
• Evaluate the reasons for all pending and planned special assessments.

Condo reviews were already a part of the mix. But the new guidelines require deeper, more meaningful inquiries.

Few board members have professional building maintenance experience. And it can be hard to guide a community through expensive choices. Homeowners hate high monthly and special assessments. Many communities vote NOT to act, even when they know repairs are necessary.

Buyers, owners, and Realtors may be willing to look the other way on some things. Fannie Mae and Freddie will not.

So now that we know what lenders must ask for, we can identify potential hot spots – things that may cause buildings not to be approved or make them hard to sell or finance:

• No response/incomplete response from the HOA
• Code violations
• Unfunded repairs that must be undertaken within the next 12 months and will cost more than $10,000 per unit
• Material deficiencies that may result in a critical element or system failure within one year if left uncorrected
• Advanced physical deterioration
• Potentially damaging mold or active leaks and water

Thinking of selling soon? Start preparing now:

Gather all other core condo documents as early possible. Doing so can improve the likelihood of a timely, successful and pleasant closing.

Ask your condo board if there are pending lawsuits, repair projects, or special assessments. Ask if there is there a reserve study. Then get those documents for review with your real estate lawyer as soon as possible. Lenders are not going to approve loans without the right answers and information. You may be able to head off problems at the pass.

Our firm can help manage the information and messaging sellers share with lenders and prospective buyers...to help get project approval quickly and efficiently.

Sellers can use our Fast-Track Sales Plan to find and address issues before they become deal killers.

Getting ready to Buy?

Ask your lender and broker about the condo project(s) you are interested in. Most lenders have access to the agency databases. Your loan officer can:

• Look up the association's status in Fannie Mae's Condo Project Manager.
• Check whether the property is Freddie Mac project-certified.
• See if the project is on their internal do-not-lend list.

These guidelines are one of many recent shifts in the real estate landscape. Understanding them can help sellers and buyers have a less stressful transaction.

Feel free to schedule a call with me (Mike) or John, our lead attorney, to learn more about residential real estate closings in the Chicago area.