In The Market For a Condo? You Can’t Afford It!

With mortgage rates at historic lows, you might think first time buyers will be falling over themselves to buy entry level homes. In California, condos count as entry level homes.  But starting April 1st, Fannie Mae and Freddie Mac have just changed their guidelines for mortgages when it comes to condos.

It may now cost borrowers between 3 and 5% more to finance a condo versus a single family home!

Fannie Mae now has a mandatory fee of 3/4th of a percentage point on all condominium loans, no matter how high the applicant’s credit score. For a once-popular interest-only condo loan with a 20% down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-ons:

  • 0.25% as an “adverse market” fee
  • 1.5% for the below-optimal credit score
  • 0.75% for the interest-only payment feature
  • 0.75% fee since the property is a condo

The total comes to 3.25% extra, which can be paid upfront or rolled into the loan. Additionally, condo units with a high percentage of investors or commercial tenants may now be impossible to finance.

Companies like Wells Fargo have also lowered the threshold for total debt-to-income ratios from 45% to 41%.  Their minimum FICO for a conventional loan without 20% is now 720, up from 620!

On top of this, getting an appraisal is now more expensive.  It used to cost about $275-$325. Nowadays, its in the range of $400-$450, with no guarantee that it will come close to where you think it will.

Another issue to be aware of when purchasing a condominium or a townhome is the reserves held by the Home Owners Association. If they don’t have enough reserves, you may be assessed for repairs.  One of my friends was assessed $15,000 for renovating the exterior of the unit. Not a small sum of money!

This is sure to negatively impact the prices of condos, which will put further downward pressure on certain housing markets. There’s nothing like more affordable housing!

Miami Condos Half-Price

Well I lost money trying to short WCI Communities (WCI) and Countrywide (CFC) by being too early. However, I was right on the money and both stocks are less than 50% from where I tried to short them.

Apparently, even the Miami condo market is down 50% from the peak too. Check out this interesting video.

I’ve heard that water-front lots in Florida that used to sell for $80,000 are now going for only $18,000! When the market turns, land gets marked down significantly more than houses. Thats why the builders are taking significant write-downs on their land inventory and are getting rid of a lot of it, or not exercising their options to purchase land at inflated peak prices.

At some point, Miami condos are going to be selling for much less than the price to build them (replacement value). That’ll be a good time to buy them. What do you think? Would you buy a condo/house if it was 50% off?