How even a strong borrower gets denied
Financing condominiums in Myrtle Beach can be a very tricky process. The difference in financing condominiums compared to single family homes is that lenders have to get the property approved in addition to merely approving the borrower. This is the main reason that I would NEVER recommend that a buyer use an out-of-town lender when financing a condo in Myrtle Beach. Lenders that are not located in the Myrtle Beach market are not familiar with our properties. Many of them have very unique characteristics which can make them difficult to get approve. Most out of state lenders are not familiar with these nuances. It is important to note that a loan can be denied because the condo is not approved no matter how strong a borrower is. Even if the borrower has a top-tier credit score, high down payment, and low debt ratio, a lender will still deny the loan if they determine that the condo building has certain characteristics.
Condo or Condotel?
There are many reasons why a lender could deny a condo for financing. Here are a few:
- The home owners’ association (HOA) may not allocate enough of their annual revenues to a reserve fund.
- The HOA may not carry adequate insurance coverage.
- There is too large of a percentage of investors as opposed to homeowners.
- Too many unit owners may be delinquent on their monthly HOA dues.
- Condotel classification – The most common reason that I see a condo denied is that the out-of-market lender has classified the project as a “condotel”
A condotel is a condo that has many of the characteristics that are found in a traditional hotel, such as: availability of nightly rentals, daily maid service, registration services, central phone system, and resort-like amenities such as lazy rivers or water parks.
Loan Denials in the 11th Hour
Many out-of-state lenders will not determine until several weeks into the process that the project does not meet their requirements. When this happens they deny the loan. Sometimes these denials come in the 11th hour of the loan process. This denial often happens after the lender has had the HOA complete a condo questionnaire; and this often happens after the borrower has paid for an appraisal and/or inspection. Quite often, these lenders will deny a building when Movement Mortgage could have actually approved the condo for conventional financing. Federal lending guidelines thru Fannie Mae and/or Freddie Mac do not necessarily classify a condo as a condotel simply because the project offers nightly rentals—but many out of town lenders will tell a borrower they cannot proceed with their loan as soon as this fact is uncovered! Generally, I am able to review the condo project, and determine that the out-of-market lender is incorrectly classifying the condo project as a condotel. When this happens, I am able to obtain a regular, conventional loan for the borrower. This means better interest rates and terms for the buyer.
Lastly, most out-of-town lenders are not going to have a condotel loan program available in the event that the condo is accurately classified as a condotel. At Movement Mortgage, we do offer condotel financing if the building is indeed a true condotel
How to Avoid a Loan Denial
The first step I would recommend, before even looking at property, is to give me a call and make sure we can get you pre-approved for financing. This way, you can make sure the loan you need is attainable. Next, at Movement Mortgage, we can go a step further, and actually obtain all of your income and asset information and submit your file to underwriting for a true commitment letter, rather than a pre-approval letter. If you take this step, you will have the ability to make an offer with confidence, and your offer will likely carry more weight than other offers that are submitted with only pre-approval letters.
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