Condo Questions

I love answering questions from readers! Carol wrote:

Can a Condominium Board affect a loan approval? Or does the Board have no say in the “type” of buyer: investor, owner occupant with a pet, or a buyer who uses a conventional loan but ends up not living in the condo? Does the lender even care about these things?

Carol’s questions involve a lot of different aspects of lending and condominium law. I’ll try and break it down and answer her questions as best as possible.

Can a Condominium Board affect a loan approval?
The board, or a member of the board, cannot reach out to a prospective buyer’s lender and somehow affect that’s buyer’s loan approval. But condo Boards through their decisions and policies can affect a buyer’s ability to obtain financing in that project.

When a lender reviews the condominium association’s disclosure documents there are several areas they focus on. Condo boards often try and keep maintenance fees artificially low by not properly funding their reserve account. That account is set up to fund major repairs and regular maintenance of the project. They have a spreadsheet of all sorts of expenses projected out for 20+ years. The association is responsible for reroofing and repaving the buildings and roads within a project. There are lots of ongoing expenses, but these are just a couple of major expenses for an example. If the reserve estimate to reroof the project is $200,000 and must be done every 20 years, the association should be putting away $10,000 a year into the reserve fund to have enough money for that work in the future. Many boards wish to be heroes to the owners and keep AOAO fees low by not funding the reserves properly. If a lender determines that the project is not collecting sufficient reserves, they will not lend to you or anyone else in that project.

Another cost cutting move condo boards try and get away with is insurance. As you are aware, home prices keep going up, and so do the costs to rebuild and replace structures. If the project were to be damaged by fire, flood, hurricane, or some other disaster, does the project carry sufficient insurance should the need be to rebuild? Some irresponsible boards will not keep up with rising costs and raise coverages. For lenders, that’s another no-no, and will lead to you not getting financing.

While condo boards don’t have a direct say on you getting a loan, they can, by their own foolish means, make the project non-approved for financing.

Can a condo project restrict owners to specific occupancy types?
I am not an attorney but did a lot of research on this topic. From what I can find, if a condo project states in its bylaws a restriction on rentals, it is legal. To clarify, I believe they can restrict you from renting the property out. If you decide to move and use the unit as a second home, they cannot restrict that. A second home by definition is an extension of one’s domicile. That is also why second home mortgage rates are generally the same as those for primary residences.

Let’s also tackle the issue of pets. This has changed over the years because condo projects have been able in the past to ban pets, except for service animals. Then with the expansion of that definition under ADA to include emotional support animals, the barn doors were literally opened, and residents threatened suit if the association tried to ban their pets. Many associations try to restrict pets by placing limits on size. Many projects require residents to carry their pet while in the elevators as an example.

Do lenders care about your occupancy after the loan closes?
If you obtain an owner-occupant loan, you will sign an occupancy agreement in your closing packet of documents. That document has two specific provisions: 1) That you will commence occupying the property within 60 days of closing, and 2) That your occupancy will not change for 12 months.

If you obtain financing for a 2nd Home, you will sign a rider to your mortgage that also has two provisions: 1) That you will occupy the property for a minimum of 14 days per calendar year, and 2) That the property is for your exclusive use, and you cannot rent it out.

These are pretty clear terms you agree to when you sign your loan documentation. But what if you don’t do as agreed and rent your place out? The lender’s recourse is to call in the loan – if they choose. In reality there’s no mechanism lenders have in place to monitor your compliance with these agreements. By in large, what lenders care for most is the timely payment of your loan. Even in the worst case, if the lender somehow found out you violated your 2nd Home Rider to the Mortgage by renting the unit out and turned you over to the FBI, they would have to prove you committed mortgage fraud. The pandemic was a perfect example in which people did everything they could to keep their property, even renting out a property that was a 2nd home. Mortgage fraud is the intentional act of defrauding a lender to obtain a mortgage. Because your situation changed and you were faced with foreclosure or violating your 2nd Home Rider, in my opinion that wouldn’t be classified as fraud because circumstances changed after you received your mortgage. I can’t speak for the banks either, but I do know the last thing they want is to deal with a foreclosure.