SANTA CRUZ (November 7, 2009) - From a layman’s perspective there are three primary forms of home ownership: the traditional SFR (single family residence), the PUD (Planned Unit Development – often referred to as a townhome) and the Condo (condominium). Both the sfr and the pud are forms of ownership wherein the homeowner owns land and improvements. PUDs are typically located close together in small developments of two or more.

A homeowner with a condo owns just the unit itself and not the underlying land. The land is owned collectively by the Home Owner’s Association (HOA), which is made up of all of the homeowners in the condominium development. Condominium developments can be made up of as few as two units or up to hundreds of units and are often stacked on top of each other.

Condos represent an extended risk to lenders for several reasons. In fact, FHA believes the risk is so great that it maintains an approved condo project list and after next month, FHA will not loan on a condo unless it is on that list. Send me an email for a copy of the approved condo projects in Santa Cruz County. It is not uncommon for condos to be the first properties to go down in value when the real estate market declines and the last to go up as a real estate market recovers. Regardless of value trends, condos are typically the most affordable type of homeownership of these three types of housing and consequently have remained popular here.

In order to maintain the landscaping, roofs, walkways and exterior siding, condo owners as well as pud owners are expected to pay dues, referred to as Home Owner Association (HOA) dues. In Santa Cruz County these can run up to $300 - $400 per month and may also include garbage, water and sewer charges. Homeowners must pay their dues or the property can be taken away from them according to the Covenants, Conditions, and Restrictions (CCRs).

Condo associations can be plagued by lawsuits that have been filed against the builders for defective construction. Once the HOA files a lawsuit, obtaining financing and, consequently, finding buyers, becomes extremely difficult. Lenders do not want to lend on a project in litigation.

When condo developments become overloaded with tenants, rather than homeowners, the care evident in owner-occupied homes is seriously diluted. When this happens maintenance goes downhill, rents go down, and values can fall. For these and other reasons, lenders generally will not loan on a unit in a condo development that is not at least 51 percent owner-occupied.

The HOA must keep a certain amount of cash in reserves to handle future major maintenance projects such as a new roof for each unit or new siding or new windows, etc. Lenders will scrutinize the reserves to make sure there is an adequate amount to cover future planned and unplanned contingencies.

To compensate for these inherent risks, lenders will charge a higher rate for loan to value ratios above 75 percent and will not consider a loan with less than 15 percent down, they expect borrowers to come in with a larger down payment and they will require higher credit scores than would be required for single family residences or PUDs. The HOA budget and reserves will also be looked at to determine the level of delinquencies of homeowner dues among the condo owners. If the delinquency rate is in excess of 15 percent, the property will not be eligible for a mortgage.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.