Community structure

Many single-family residences are situated in a complex shared with other residences. The four most common include the following:

  1. Cooperatives
  2. Condominiums
  3. Townhouses
  4. Planned unit developments

Cooperatives

Strictly speaking, residents in a cooperative do not own their units. Instead they own shares in the cooperative, which then assess the individuals based on the specific unit they occupy. Obtaining mortgage financing for cooperatives is often difficult, with most co-op buyers having to search for banks who specialize in co-op mortgages.

The individual unit dwellers of a cooperative do not own any property. The entire cooperative is owned by a corporation and not by individual owners. The shareholders of the cooperative gain the right to particular units and to use common areas. The unit dweller thus leases the unit from the corporation; and it is the cooperative that owns all of the units.

Because the cooperative is a single corporation, it is taxed as one corporate entity. Since the units are not individually owned, the entire co-op project is financed with a blanket mortgage. Individual mortgage loans will finance a portion of the entire blanket loan for each of the shareholders.

A final element of the cooperative project is that prospective unit owners must be approved by the current stockholders. In this way, the cooperative project can act as an exclusive club or organization. Cooperative projects present a higher degree of risk for lenders. The most influential risk factor is that if one unit owner (mortgagor) defaults on his or her loan, the entire cooperative project can be foreclosed.

For more information, see the "Cooperatives" article.

Condominiums

Condominium units are individually owned; each owner is then a member of the homeowners association which owns and maintains the common area. Unbeknownst to many, however, most condo owners only own the air space within their units.

Mortgage loans for condominiums are processed the same as for regular single-family homes, except that additional documents and restrictions are required. For example, the homeowners association or condo manager must complete a lengthy questionnaire about the complex.

In addition to the standard loan application requirements, the following condominium documents must be collected:

  1. Condominium certificate and insurance information form. This questionnaire is sent by the mortgage processor to the condominium association. The certification will request information about the size, type and occupancy rate of the condominium property. The insurance information request that makes up the latter half of this form gathers information about the condominium's blanket insurance.
  2. Assessment letter. In this assessment letter, the condominium association will verify what the current assessment dues are for the condo unit involved in this loan application. In the case of a refinance, the assessment letter will also indicate the owner's payment record.
  3. Copy of insurance coverage certificate. The insurance company that is insuring the condo property will have provided the condominium association with a document indicating the type and amount of insurance coverage. The mortgage lender needs a copy of this certificate for the application package.
  4. Copy of owner's policy or master deed. The condo association will have provided this to the unit owner at the time of purchase. A copy of this policy must be presented for verification.
  5. By-laws of homeowners association. The association by-laws manual is often required.
  6. Association budget. The association's budget must demonstrate sound fiscal management.

Most conforming lenders require condominium projects to meet Fannie Mae and Freddie Mac requirements. Analyze the appraisal, title, owner's policy or master deed, condo by-laws and condominium certification letter for information about these criteria.

  • All common areas, facilities and amenities must be for the exclusive use of the owners.
  • Title must be fee simple (straightforward ownership).
  • At least 60 percent of all units in the project must be owner-occupied by the unit owners as their primary year-round residences or second homes.
  • No single entity (the same individual, investor group, partnership or corporation) may own more than 10% of the total units in the project.
  • The project is covered by the kinds of hazard, flood, liability and fidelity insurance that most conforming lenders require for condominiums.
  • All rehabilitation work related to condominium conversion must be 100% completed.
  • All condominium conversions that were legally created within the last 3 years must provide a review of the architect's or engineer's report that was obtained at the time of conversion.
  • Zoning must allow the property to be rebuilt to current density, if partially or completely destroyed.
  • The phase in which the condominium unit is located must be 100% completed.
  • At least 70% of the units in the condominium project have been sold or are legally obligated to close, to purchasers other than the developer.
  • Project must have a minimum of five (5) units.
  • Loans in any one completed development are limited to 10 loans or 25% of the units in the project, whichever is the lesser.

Fannie Mae and Freddie Mac also offer limited review condo programs (at lower LTVs) for condominium properties that may not meet all of their Class I or Type A requirements.

For more information, see the "Condominiums" article in the "Real Estate In-Depth" section.

Townhouses

Townhouses are similar to condominiums in most respect. They are also processed in a similar fashion.

The primary difference is that many townhouse owners also own the land on which the townhouse is built. They also own the walls, although they must share the party walls adjacent to the neighboring townhouse. For more information, see the "PUDs and Townhouses" article.

Planned unit developments

PUDs are looser associations normally consisting of houses and residences that are part of a development or neighborhood. These neighbors are legally part of this PUD, which pools funds to maintain common areas and responsibilities, such as mowing greenways and snow-plowing roads.

There are few additional requirements for PUDs. The key tasks involve verification of PUD assessments and restrictions. For more information, see the "PUDs and Townhouses" article.

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