Have you struggled getting a mortgage on a condo due to nearby rental units?

I live in a townhouse which is part of a homeowner’s association. The president of our HOA is concerned that, if we get too many rental properties in the complex, it will become more difficult to get a mortgage or do a refinance.

She is proposing a cap on the number of rental units and this was the most informative site I could find. It confirms that too many rentals can make home financing more difficult and that HOAs are legally allowed to implement caps.

I would like to hear personal stories, if you are willing to share them, about any difficulties you had with financing a condo in a complex with too many rental units. Were you denied a loan or was there just more paperwork and higher interest rates.

Thank you!

How many total units are there? How does the lender/refinancer know how many are rented? This topic comes up in our condo community of 104 units but no one even keeps track of how many are rented (least of all the property management company being paid to manage the property).

There’s a lot of folk tales surrounding this subject, and I recommend you get the straight dope about current mortgage lending practices from a mortgage broker or other knowledgeable professional. What was a worrisome rental percentage even 10 years ago isn’t necessarily a problem today.

I purchased a 4-plex in 2005. The problem I ran into was too many investors purchasing property in the area. At that time Freddie May or Freddie Mack should not have approved for an investor if too many of the properties in the are were mortgaged by investors rather than owner occupied. I think it was 50%. I was doing a 1031 exchange purchase so I had a 75% down. I could not get a loan from any bank because about 85% of the units in the area were not owner occupied. I could get the loan if my wife and I moved into one of the units.

I had to borrow money from the hard money market. $100,000 at 10% when bank loans were in the 8% range.

I’m a mortgage processor at a local bank. I’m not an underwriter, but I’m very familiar with residential underwriting requirements in our market (including a not-insignificant number of condos).

We use a standard condo questionnaire that the HOA is required to complete before we will approve a loan at any project. In addition to the condo questionnaire, we also need to review the bylaws, budget, and master policy (liability insurance covering the project as a whole). I believe most HOAs charge the borrower a fee to fill out the questionnaire, but that is not a part of our transaction. We’re a Freddie shop, but the questionnaire we use was developed by Fannie. I believe this is a standard form across the industry, but I can only speak for my employer’s practices.

You may find this Freddie Mac condo guide helpful. The “ineligible projects” section on page 2 is good reading. It’s geared toward underwriters, but you don’t need a financial background to understand the basics. The percentage of owner-occupied units is one of the (many) questions asked to determine sufficiency of the collateral. But this is really only a factor if the condo is purchased as an investment property (see: bottom of page 3). In that case, a minimum of 50% of units in the project must be owner-occupied. But if it’s being purchased as your primary or second/vacation home, we don’t care.

I’ve experienced a few issues that will kill a deal outright, such as pending litigation, or a significant proportion of units that are delinquent on HOA dues. Freddie guidelines do not permit us to lend in projects where >15% of units are >60 days delinquent. Apropos of nothing, just some interesting tidbits :slight_smile:

The right (or lack thereof) of HOAs to enact restrictive bylaws ref rentals is a matter of state law. So it’s worth ensuring you understand the local rules and don’t take advice or anecdotes from areas with different rules.

Well it will only become more difficult for those that currently own investment units for lease. It should not be more difficult for those owners that reside in their units.

If the HOA places a cap on the number of units available for rent, which owners get the right use their units as investment assets and which owners don’t? The mechanism that is used to determine this is what will be the most controversial among the owners. Someone is going to feel slighted, either now or down the road.

I didn’t want to swamp my OP with all my thoughts, since overanalysis is one of my 17 major flaws.

We have 15 units, four of which (26%) are currently rentals. According the document that I linked above, at 30%+ some lenders may have hesitation at lending.

Putting in the cap has consequences:

  • Need to amend the official documents (Lawyer fees)
  • Potentially annoy neighbors who want the option to rent in the future
  • How to enforce? (Not too bad at 15 units, but still a pain)
  • How long does a unit get to stay a “rental”? Should there be enforced turnover in the opportunity to rent?
  • Potential legal battle if an owner decides to fight it.

We have a really nice community of neighbors who talk to each other, help each other out, get together 2-3 times a year to do maintenance work on common property. I want to keep that community. Too many rentals risk that, but so does pushing for a rule which angers a number of owners.

Thus, I wanted to get a feel for whether this is a real risk.

I do plan on calling up my credit union to ask their policy about rental percentage for loans, but want to get a few personal stories of the challenges (if they exist).

Thank you.