Banks Get Funky
Things Have Changed
As a loan rep from one of the remaining primary lending sources told me at a closing recently, “It just isn’t fun anymore”. The underwriting process has gotten draconian to say the least and loan officers don’t seem to know exactly what will happen once a loan goes on that funhouse ride called “underwriting”.
What to Know
To ease the pain of getting through the lending process, here are a few suggestions on what to know if you will need financing when purchasing an apartment.
If the co-op or condo has a high percentage of sponsor or investor units (that is, units still owned by the developer or by a third party, such as a bank that has foreclosed on the sponsor and has seized the apartments that secured the sponsor’s construction loan), obtaining financing in such a building will be geometrically more difficult. If actual owner-occupancy is less than twenty-five percent, financing will probably not be available on commercially reasonable terms. Banks simply will not lend in new developments where there are only a few real owners in occupancy. If the owner-occupancy is between twenty-five and fifty percent, things improve. Once owner-occupancy is above fifty percent, this issue should go away. Do not underestimate the bank’s unwillingness to lend in low owner-occupancy buildings.
Beware of the Out-of-State Bank
If you are buying a co-op and seeking a bank loan or are refinancing a co-op loan and you are using an out-of-state bank, have a bottle of Tums handy. Out-of-state banks don’t understand how co-ops operate and often ask for documentation that co-ops never provide. The classic request is for the bank to be added as a loss payee on the co-op’s insurance policy. Although banks are added as a loss payee on a condo’s insurance policy, it just does not happen with co-ops. If this condition shows up on a bank’s commitment letter, in almost all cases, the loan is dead in the water, as the co-op simply will not comply with this condition.
Include Mortgage and Funding Contingencies
As I outlined in “The New Normal”, I cannot emphasize strongly enough that contracts have to contain mortgage contingencies and funding contingencies, to protect against lending uncertainty. Buyers should be aware that a loan commitment will contain various conditions that have to be satisfied, sometimes by the buyer or seller, sometimes by the co-op or condo (such as the co-op or condo meeting certain financial criteria or the borrower qualifying for private mortgage insurance, which is an entirely separate underwriting). If there is no financing contingency, and the buyer is unable to obtain a loan, the buyer will still be obligated to go forward with the purchase. In short, the “all cash contract” should be avoided like the plague.
Further, banks are changing their underwriting guidelines frequently:
Example: In a recent transaction (to be discussed further in a future article), a bank offered my client ninety percent financing (not easy to get these days); two weeks later, the bank withdrew the financing program it had initially offered; two weeks later, the bank reinstated the same financing program. That loan is currently in underwriting. To be continued...
Banks can also withdraw underwriting after a loan commitment is issued, which can place the purchaser in a precarious financial situation. For this reason, push hard for the funding contingency in addition to the financing contingency.
Know Your Lending Source
There are only a few big players left in the residential lending market today (Bank of America, Wells Fargo, Chase and a few others). Then there are the “mortgage banks”. These are entities that hand off the loan to private investors who hold the "paper" (that is, your promissory note) or who underwrite loans for resale to larger lenders after the closing takes place. You can throw Internet lenders into that mix as well. Make sure that the alternate lending source is familiar with the co-op or condo that you are interested in and has made loans in that building previously. These lenders sometimes impose conditions at the time of commitment that can create an impediment to the loan actually closing.
Example: A loan commitment from an Internet lender conditioned the loan on the monthly maintenance not exceeding a certain amount at closing. After the contract had been signed, and despite the managing agent’s representation that no maintenance increase was contemplated, the Board of the co-op imposed a minor increase that caused the maintenance on the proposed purchaser’s apartment to increase by $30.00 per month. At the closing, after all the papers had been signed, the bank’s attorney noticed the slight increase in maintenance, which exceeded the permitted amount in the closing instructions from the bank. The giddy mood turned somber, as the bank’s attorney left the room to call the underwriter and reveal his discovery. Two hours later, the underwriter approved the increase in maintenance and the transaction was completed (along with a collective sigh of relief around the closing table).
In all fairness, mortgage banks and Internet lenders now fill the void caused by so many banks leaving the residential lending market. That being said, it is often difficult to know exactly who you are dealing with, how long the underwriting process will take and whether there will be any surprises at closing. Those loans usually close, but in my experience, it’s never easy.
Residential Reality: Banks give “funky” a whole new meaning.
When looking for an apartment these days, it makes sense to have your lender lined up before you tender your offer. Do as much due diligence on your potential lender as the lender intends to do on you. Make sure you know your borrowing limits and your bank’s tolerance for the co-op or condo in which your proposed apartment is located. When it comes to getting funky, better to stick with “Brick House”.