In the preceding articles on Condo-Hotels, we were exploring the definition of Condo-Hotels in general, and then we saw a summary on how to select a vacation Complex and finally, the homework’s the buyer had to do before considering buying his dream unit. We also learned that the most Popular Locations where you will find Condo-Hotels was:
In the US, the most popular locations for condo-hotels are, as you probably imagined, large tourist cities and famous resorts like Aspen, Chicago, Fort Lauderdale, Hawaiian Islands, Las Vegas, Miami, Myrtle Beach, New York City, Orlando, Florida and the list can go on.
Condo-Hotels outside the U.S. can also be found in Costa Rica, in the Dominican Republic and other well-known Caribbean countries. In the Philippine Islands, in Canada, Dubai, and in many other exotic destinations, you can find exquisite condo-hotels, perfect for investment, for a vacation house or for renting out as a tourist.
You will also notice the mortgage rules could differ depending on which Country you have interest in buying your Condo-Hotel unit.
It is also allowed to ask yourself again if: you can afford to buy A Condo-Hotel unit?
General Condo-Hotel financing requirements
The 28/36 Rule is a good rule of thumb for determining how much debt you can take on. The rules state that you should spend a maximum of 28% of gross (pre-tax) income on housing costs. … This is the most you should spend on housing costs, including mortgage, property taxes, insurance and condo fees.
To qualify for financing, first consider a minimum of 20% but many are requesting 25%. The unit must have a minimum of 500 square feet. The unit must have a fully functional kitchen with at least one bedroom. The minimum loan amount is $100,000. Maximum loan size is $3,000,000. Each developer add is own set of requirements to be truly understood by the buyer before signing any document.
Your credit score needs to be at least a 580 to get financing. Yes, it depends on what you consider “fair credit” but 640 are the minimum credit score. If the condo association is FHA approved.
-The borrower needs one year reserve which can be in pension funds, investment accounts, or other documented assets for both the primary residence as well as the subject unit purchase
-A maximum of 40% back end debt ratio is required
-In the event the financing borrower is short in wage income, other income sources can be used
-They can use the asset depletion program where a percentage of the borrower’s assets can be used for income qualifying purposes
Of course, there are so many new players, it is not like 25 years ago, it was then easier but not sure if it was as secure for the buyer then today. There are many ways to finance a Condo-Hotel unit; we will see 3 of the easiest forms and the most popular to acquire a loan for a Condo-Hotel unit.
Warrantable or Non-Warrantable
When you are planning to buy a Condo-Hotel unit, the first thing you should do is checking if the building’s warrantable or not.
In short, if the project is A non-warrantable unit, by definition, is a complex that does not meet the minimum eligibility standards as set by Fannie Mae and/or Freddie Mac.
Your mortgage loan originator should provide you with a condominium questionnaire that should be filled and signed by the condominium homeowners association. In case it proves to be unwarrantable then you cannot get a conventional loan.
When the building fails to meet their standards, it’s often for one or more reasons like:
-The project is more than 10% owned by one entity
-50% or more of the project units are rentals
-More than 20% of the building square footage is “commercial”
-The project is filed with the SEC and is sold as an investment opportunity
-The project is “new” and grants concessions and/or abatements not listed on the settlement statement.
Due to these rules imposed by Fannie Mae and Freddie Mac, some property types fall into the non-warrantable category. In this category we can find condo-hotels, time shares, fractional ownership properties, and other projects that require the owners to join an organization.
The fact that the condo-hotels are unwarrantable doesn’t mean you cannot find a mortgage loan available on the market to fund such real estate properties.
Other Options available
You are then left with 2 other options to buy a condo that is not warrantable:
• Buy the condo-hotel with cash.
• Buy the condo-hotel with a portfolio loan.
You can find portfolio loans with small banks or credit unions. These are what some would call “common sense” loans. Portfolio loans provide the opportunity for borrowers including condo projects to get financed. With a portfolio loan, the lender that initially wrote the loan is going to keep it as part of their investment portfolio.
Contrary to what some people are thinking, there is nothing riskier about portfolio loans, as most portfolio lenders are small, privately owned community banks and they are more flexible when establishing the terms for a portfolio loan.
You can find options for 3, 5 and 7 years ARMs with a little bit higher than usual originating cost. Terms and conditions depend on a lot of your credit score, type of occupancy (primary residence, second home, or investment property) and of course on the down payment you are providing. These items will determine the total cost of your mortgage loan.
Closing Costs on Condo-Hotel
Any condo mortgage loans require closing costs. Closing costs vary depending on the condo complex, city, county, state. Closing costs vary. Closing costs can be anywhere from 2% to 6%. Do not be shy to negotiate at every step of a transaction.
In the next article, we will treat different type of renting contract and their impact on the end result in relation to your unit. This step could be the difference between a great investment or not so good.
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