If you're in the market for a condominium, you may find it a little harder to raise mortgage money than for a single-family home.
In theory, houses and condos are about the same. In both cases you own the deed, seek mortgage financing, pay your own real estate taxes and take the profits when you sell. A condo is a home within a larger building rather than a home on a separate plot of land.
Many condominiums are just as easily financed as detached houses, and on the same terms. But others are not popular with lenders. Here are two situations that lenders might avoid, according to Dallas Bennewitz of the U.S. League of Savings Associations:
Buildings where 40 percent or more of the units are rented rather than occupied by their owners. Monthly maintenance costs tend to be higher in heavily rented buildings, and tenants don't always take good care of the property. "Renters demand more services than owners, and more things can go wrong," Bennewitz told my associate, Virginia Wilson.
If you buy a condo in a partly rented building, maintenance costs may rise more sharply than you expected -- maybe to the point where it's hard for you to carry the property. Lenders worry about this.
Buildings that are new to the lender. Condominium bylaws typically run to dozens of pages and occasionally restrict the mortgage lender's right to foreclose or to resell. Naturally, no lender wants to get caught in that sort of bind. So all the papers on each condo project have to be studied closely by the lender's legal department, which may not want to do the work for just one loan.
Where a building is being converted from an older apartment house, the lender may want to study the engineer's report and other documents to be sure the place is sound. If the bank actually is working with the builder or converter, it has a good sense of what is going into the building and what the units are worth. But if the lender has had no previous connection with the project, it may not want to get involved.
Lenders also may shy away from buildings that are running down. A poorly governed condo may not know how to handle deadbeats, collect maintenance payments on time and keep the building in good condition. As the lobby and landscaping starts to look tacky, mortgages become harder to get.
You can often raise money for a run-down house in a good neighborhood because the bank expects you to refurbish it. But no matter how much money you sink into your condominium unit, you cannot singlehandedly put the entire building back in shape.
Your own bank or savings and loan association is the first place to look for condo financing. Sometimes those agencies finance their own customers at lower interest rates than they charge strangers. If your bank won't help, try the bank that financed the condo project.
In many cases, financing is available through the builder or condo converter. Some builders can provide you with a low mortgage-interest rate for the first few years that you own the condo. Others may pay you a monthly rebate for the first year or two to lower the unit's carrying costs.
Cooperative apartments are a different form of ownership from a condo, and harder to finance. With a co-op you do not directly own your living unit; you own a share in the building as a whole. These apartments are found mainly in New York, Chicago and Washington, and typically exert more control over who buys into them than condominiums do.
When a bank lends you money on a co-op, it cannot easily resell that loan to third-party investors, as is commonly done with condominium loans. The ability to resell loans is crucial to banks because that's the only way they can replenish their pools of lendable funds.
The nation's largest mortgage buyers -- the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. -- recently considered a program for buying co-op loans, but both put it on a back burner. So financing will stay tight. Co-op apartments generally require larger downpayments than condominiums do; co-op loans carry higher interest rates and usually are made available only to higher-income people.