When a new condo is still under construction, home shoppers can buy now and pay later. Lenders are generally willing to finance units in buildings that are in development, but they won’t close the mortgage until the unit is completed, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. In the nation’s fastest-growing markets for new condo development, borrowers often need a jumbo mortgage. These loans exceed conforming-loan limits of $417,000 in most places and $625,500 in high-priced areas, such as New York. Qualifying a borrower for an under-construction condo is largely the same as for any home, says Jason Will, national condominium manager for Wells Fargo Home Mortgage. The buyer’s credit score, income and assets all come under review. However, while a free-standing home needs title insurance and an appraisal at or above loan value, when it comes to a condo loan, lenders require documentation for the entire building, Mr. Will says. Examples include a master insurance policy that covers the whole property, the contract between property owner and homeowners association, and a certificate of occupancy from a local government agency verifying compliance with building codes and other requirements of habitability, he adds.
Lenders typically also will refuse to close a mortgage if less than half of the building’s units have sold to owner-occupants—investors don’t count, says Michael J. Romer, a partner at Manhattan-based real-estate law firm Romer Debba LLP. Low occupancy worries lenders because building maintenance, taxes and certain other costs would be spread across fewer residents, increasing the odds of default. To meet the requirements, developers often court cash buyers first. They also frequently partner with a “preferred lender,” which can help ensure there are enough buyers to meet the owner-occupancy requirements, Mr. Romer says. But even preferred lenders will only take on a certain amount of risk in one building—typically no more than 20% to 30% of units, he adds. If a building doesn’t meet lender requirements upon completion, the buyer either forfeits the deposit paid to the developer, buys the unit with cash or rapidly procures alternate financing—which could have a higher interest rate, Mr. Will says. Down payments vary geographically, with New York around 10% to 20% of the total cost and Miami as high as 30% to 50%, he adds. Lenders typically want a down payment of around 20% for a $1 million jumbo mortgage. In highly competitive markets like New York City, sellers frequently insist that borrowers waive the financing contingency, meaning that they are committing to purchase unconditionally, says Jeffrey Silverman, in the New York office of Providence, R.I.-based Citizens Bank. Borrowers also should keep in mind that some lenders won’t lock interest rates for more than 60 days without charging a fee, so rates may be higher than when the loan was preapproved, Mr. Grabel says. However, other lenders like Wells Fargo, will lock a rate up to two years before closing, Mr. Wills says. Citizens Bank will lock rates up to 18 months, but charges a premium of 0.75% above market rate for that lock, Mr. Silverman says. If rates are lower 60 days before the anticipated closing, however, the borrower can get the lower rate, he adds. Here are a few more considerations for borrowers financing a new condo with a jumbo mortgage:
Higher closing costs. Local governments may levy additional taxes on a new home purchase, Mr. Romer says. For example, New York City buyers typically pay the 1.425% transfer tax on a unit priced more than $500,000, commonly covered by the seller on an existing home. That’s in addition to 1.925% (or nearly 2)] state mortgage taxes and a 1% mansion tax on any residential purchase over $1 million.
Keep finances consistent. Between mortgage preapproval and closing, borrowers should try to avoid a job change, major asset sale or divorce, Mr. Silverman says. “We run income, credit score and assets two, three times or more during the process,” he explains.
Be flexible. Buyers should be careful when coordinating a home sale or rental move-out with a new condo purchase, as many factors can delay completion, Mr. Grabel says. “You need to understand it’s out of your control,” he adds. This article originally appeared in The Wall Street Journal.