Run, don't walk away from 'unsellable' purchases

Dear Ms. Mortgage Maven,I saw a condominium that I just love. It is larger and nicer than all the other units I have seen on the market. I put in a $1000 deposit to hold it at the current price because prices are going up this week. It is in an eight-unit complex. Two of the buildings are new condo conversions, the other six buildings are rentals.

I am in the military and wanted to use a Veterans Administration loan to buy the property. However, I just learned, after visiting the sales office several times, that I have to use one of the two lenders approved by the seller. Even though these are both major, national lenders, neither of those lenders will let me use a VA loan. Also, I only learned now that not only can I not use my VA loan, I cannot use an outside lender at all (but I do get a 3% seller concession for using one of the two approved lenders). I do not know what to do. I really want this condo but I am feeling betrayed since I have spoken to the people in the sales office several times and no one ever explained all of this to me. Can they require me to use their lender?

Mr. Z.

Dear Mr. Z,

The most important item of information you used to describe your situation probably seems the most insignificant to you - two of the buildings are condo conversions, and six of the buildings are rentals. Why is this significant? Because Fannie Mae, Freddie Mac, FHA and the VA requirements for condominium projects limit the number of rental units. If the number of rental units is too high, the project will not meet their loan guidelines or mortgage insurance guidelines. I think this is the real reason you are limited to using the condominium projects approved lenders - the units will not qualify for financing from any other source.

The most important question is if these units will not qualify for traditional financing, how will you sell your unit and cash in on your "equity?" You can bet your property will be assessed for tax purposes, and assumedly, over the years, the "value" of your property will rise, but if no one qualifies for financing to buy the property when you want to sell, what is the real value of your property? In my book, it is practically zero. People need financing to buy houses, plain and simple. No financing, no sale.

Lending and mortgage insurance guidelines (Fannie Mae and Freddie Mac control the bulk of lending guidelines, and FHA and VA "loans" are actually not loans, but mortgage insurance from the government for the lender who makes the loan) in this market have tightened, but even under the old guidelines, a condominium building that is part of a majority rental project would never have qualified for financing under anyone's guidelines. Even when the market returns to its pre-meltdown status, I do not think lenders or mortgage insurers will accept a condominium with a minority of owner occupants.

The lenders who are doing loans now have some sort of deal with the condominium developer. That deal will end once those units are sold, leaving you holding the bag. Maybe if you got an assumable mortgage, someone would take over your property when you are ready to sell. Another scenario would be finding an all- cash buyer, but I am assuming you are a first-time home buyer and that your sales market will also be first-time home buyers. First-time home buyers are not the all-cash market. People can generally pay all cash for a property when they sell a property with enough equity to buy their new property, which is often smaller or in a cheaper locale than the property they sold (think retirees who owned their home for 30 years and are moving to Florida).

Can they require you to use their lender? If you want this condominium, and no other lender will do the loan, then you have no other alternative.

My advice is to keep on looking for another condominium, one that has a majority of owner occupants and limits the number of rentals to a small percentage of the project. I would not only walk away from this project, I would run. Best of luck.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage. Call or email her to discuss your home purchase or refinancing needs. She can be reached at 202-607-4449 or Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.