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Don Maher

Loans For Condos With HOA Litigation

Tuesday, September 4, 2012 - Article by: Don Maher - Universal Capital Mortgage Corp - Message

The #1 reason for cancellation of purchase contracts for condominiums is "HOA Pending Litigation". This means that he HOA is currently involved in litigation in one form or another, which is prohibited by FNMA, FHMC, and FHA. 90% of the time, the litigation is between the HOA and the builder for "builder defect" issues. These lawsuits can take upwards of 2-4 years to settle, and during that time, conventional "Agency" loans cannot be originated in the condominium project.

In recent years, smaller "portfolio lenders" have created programs for situations such as this. Programs are available for condos that have pending litigation, but there are conditions. The most important condition is that the new home buyer must be well qualified. Typically, a conventional lender (FHA and FNMA) will require a minimum of 5-10% down, a credit score of at least 620, and debt to income ratio of up to 55%. Whereas a portfolio lender will require a 20% down payment, a credit score no less than 660, and a debt to income ratio not to exceed 45%. The guidelines are more strict to offset the additional risk the lender it taking.

Once a homebuyer is qualified, they must be prepared to pay a slight premium to obtain a home loan in a building with HOA litigation. You can expect to pay about .5% more in interest rate, and about 1.00% more in loan origination. While the upfront cost is a little more, you will make it back up in the form of increased equity once the litigation is over. The average condominium in litigation is valued at 10-13% less than comparable units without litigation. For example, a unit with litigation is listed at $275,000, while a comparable property without litigation is listed at $310,000. That's a $35,000 difference. It may cost the home buyer an additional $2200.00 in loan fees to get the loan, and about $1100 in a higher interest rate per year, but once the litigation is over, it will be well worth it.

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