The difficulties in the coastal condo markets has affected the condo market here in the Kansas City area as well. This is especially true on newly constructed condos where Fannie Mae lending guidelines have become much more stringent. Fannie Mae has indicated the organizations lack of interest in backing condo loans unless the particular new home community is well on its way to completion. This poses an obvious chicken versus the egg dilemma of  selling condos when a community is in the infant stages so you can get the community to the point that it is Fannie Mae approved for home buyers.

This is a serious problem when it comes to condo sales because many lenders rely on obtaining Fannie Mae approval before committing to provide a borrower the loan. The result of Fannie Mae rejection is leaving many condo developers scratching their heads and also putting many homebuyers in a difficult position. These buyers often have  to work much harder to get their loan in place and it threatens to put the borrower’s earnest money at risk. On new home construction in Kansas City, a buyer’s earnest money is typically non-refundable. I recommend bucking tradition and having a buyer demand the contract be written to make their earnest money refundable for 30 days while they work to secure their loan. Given the alternative, many developers and home builders will be willing to concede on this point.

In 2008 I had three newly constructed condo listed and, once the properties went under contract, it was quite a process to get them closed. As discussed previously, these new condos were categorized as “non-warrantable” by Fannie Mae. This means that the lender making the loan would likely encounter difficulty if trying to sell the mortgage loans off (now or later) to another investor. Keep in mind that a majority of lenders ultimately do intend to sell their loans off.

Knowing that very, very few borrowers can pay cash for a home, the other option that comes to mind is checking to see whether the developer of the community would be willing to finance the buyers. But finding developers capable and/or willing to get into the lending business is difficult at best. I checked with several lenders I know and without Fannie Mae approval it wasn’t going to work out. So I decided I’d have to take the unusual measure of interviewing many lenders. It was my plan to ask (1) if they are capable of providing mortgage loans on non-warrantable condos (assuming a qualified buyer with good credit and 5% down payment), (2) if they offer a 30-year fixed rate loan on condo loans (rather than risky 5-year ARMS) and (3) if they are able to provide the loans at reasonable rates and loan costs.

So I was off and running and after looking over a large lists of lenders I narrowed things down to 27 that I intended to contact. In my initial email to these lenders, I only asked whether or not they were capable of providing loans on non-warrantable condos. Five of the lenders never called me back. 17 of lenders told me to take a hike – and I politely told them “I think I will, the weather here’s sweet” (ha, ha). So this left five lenders who said that (assuming a solid borrower) they were capable of providing loans on non-warrantable condos. Things were looking brighter.

So it was on to the second question of whether these lenders were able to offer a 30-year fixed rate loan. Unfortunately two of the five lenders only offered 5-year ARMS and just in case you’re not up on ARMS these days, ARM rates are horrid. Not to mention ARMS are at the crux of much of the real estate mess we are seeing today and in today’s market should be avoided in most cases. Those two lenders we’re thus removed and I was down to three possibilities. So it was on to the next questions of rates and fees. One of the remaining three quoted interest rates and fees that were so high I asked him the last time he made one of those loans. He said “all the time” but forgive me if I don’t believe him. 

So I was down to two lenders and fortunately things improved from there. These lenders were offering 30-year fixed rate loans and also at solid interest rates and reasonable loan fees. As an added bonus, both were responsive and one of the lenders responded just slightly quicker than the other. Things moved swiftly thereafter and one of the sales closed in two weeks. It was great to see the deals close and although I didn’t represent the buyers in these transactions, it was very rewarding to see them smiling at the closing table.  It certainly would have been easy to throw in the towel early in the process but this was a case where persistence paid off.