Condominium Associations: Limited vs. Full Review
Condominium projects are a bit of a different breed when it comes to financing and you’ll probably hear the term limited or full review along the way. Compared to say a single-family residence, a condominium owner owns the interior space of the individual unit and shares equally the common areas with the other owners. Common areas are spaces such as a management office, workout facility, sidewalks and landscaping. Maintenance and management of these common areas are supported by homeowner’s association dues that are paid annually or by the month. A single family residence owner not only owns the physical structure but also the land upon which it sits. And that’s the primary difference between a condo and a single family home.
As it relates to financing then, lenders need to not only approve the borrower and the individual unit but also approve the condominium project as a whole. How does a lender approve the entire project? There are some basic things that condos must be able to show and depending upon the type of loan being applied for, the list can be rather short or more thorough. Lenders refer to this type of review as either “limited” or “full review.” As the terms imply, the process to approve a particular condominium project can be rather brief or in depth. A full review will require a much longer approval process. No matter how strong the nature of the borrower’s credit or income the project must still be approved.
A limited review is a short list of questions the project management must answer. For a conventional loan approved using Fannie Mae guidelines, the questions are listed line by line. The limited review wants to make sure the condominium owners are in control of the Homeowners Association and no longer under the auspices of the developer. All of the common areas must be completed and there are no future phases planned. Is there any commercial space and if so how much space is dedicated to commercial enterprise? Is there any current or planned litigation? Are more than 50 percent of the units rented out? Does any single entity own more than 10 percent of the total number of units? Is there a minimum $1 million in liability coverage for the project and others.
The project management will complete the form and return it to the lender for review. Once the review has been completed and the project meets the requirements for an approval, the loan application can proceed.
A full review goes much deeper and most of the full review looks more at the financials compared to a limited review. In addition to the questions asked on a limited review, a full review requires a full budget review and reserve study. Lenders are required to review the budget to determine there are enough available funds for capital expenditures and any deferred maintenance that accounts for at least 10 percent of the entire budget. The reserve study must be completed by an independent third party such as a construction engineer, certified public accountant with reserve study experience or any licensed professional with experience completing reserve studies. The rules that govern the association, or the CC&Rs must also be reviewed and approved and other requirements.
So why doesn’t every lender simply use the limited review process and avoid the full review? It depends upon the amount of down payment. If a borrower makes a 25 percent down payment, a limited review is an option. Less than 25 percent down will typically mean a full review is needed.