6 Reasons the Building You Want to Buy in Might Not Be Approved by Your Bank
Did you know even if you are a well-qualified owner with a good credit score and money in the bank, your mortgage applications can be denied or delayed because of issues with the building?
In this article, we are going to tell you 6 ways your mortgage applications can be affected by your building, including not having a Certificate of Occupancy. In most cases, these problems can be solved quickly but because of rising interest rates, even a short delay can be terrifying to some buyers. The reason? Rate locks expiring.
You can typically have a rate locked in for 60 to 90 days. After that, buyers have to pay weekly fees to extend the time or lose their rate and start all over again at the new market rate.
Because of this problem, buyers may be encouraged to waive the mortgage contingency to compete with all-cash offers. A mortgage contingency is a clause that allows buyers to cancel the contract of the home purchase without penalty and receive a refund of their earnest money deposit if they’re unable to secure a mortgage. You and/or your attorney’s due diligence could uncover a building issue that is a big enough concern for your lender to deny your mortgage. Without a mortgage contingency, you lose your deposit.
Get reassured before you sign a contract with your lender you will be able to get approval on a loan. Here are the 6 issues you want to avoid.
1. An expired temporary Certificate of Occupancy
Without the Certificate of Occupancy (C of O) or the TCO, it can halt the mortgage process. Banks need at least a Temporary Certificate of Occupancy (TCO) to issue financing. These certificates establish the legal use of the building and need to match the physical space.
Things to know:
- If the building doesn’t have a final C of O, you need to establish the status of the TCO.
- TCOs typically lapse on a quarterly basis.
- Sometimes a sponsor of a new development will schedule a closing without the TCO on the assumption they will get a TCO at the closing.
2. Not enough in the buildings reserve fund for repairs
A bank will want to see that the apartment building is in good financial health and that means looking at its reserve fund. If not, they could refuse to lend to you.
Fannie Mae, a government-backed entity that buys loans from banks, recently issued new guidance that went into effect this year. It says lenders need to see that a building has 10 percent of its budget in reserve for repairs, maintenance, and special assessments. Many big lenders are following Fannie Mae guidelines, making it relevant for buyers needing larger loans as well as those getting conforming loans.
What can you do:
- Take a look at a building’s financial statement at any point in the buying process to get an indication of whether a lender will be comfortable with your purchase.
3. There are too many sublets in the building
Sublets in NYC are common. When New Yorkers left the city at the height of COVID-19, many rented out their apartments. In any case, lenders don’t want to see too many sublets or non-owner-occupied apartments in the building in which you plan to buy. Co-ops often have restrictions on sublets but many buildings relaxed their rules on this during the past two years to accommodate owners.
Get your lender familiar with the building before you waive any contingencies. You or your attorney can send out their own due diligence questionnaire to the managing agent to get answers. Banks can also send a separate questionnaire to find out all the details about the building, as well.
4. Your apartment is appraised for less than the sale price
Sometimes, an appraisal comes in at a valuation that won’t allow a buyer to get the loan amount stated in the contract. If you have a mortgage contingency, you can cancel and get your deposit back or try to renegotiate the price.
What if I don’t have a contingency in my mortgage loan contract?
“In a non-contingent scenario, in the event of an under appraisal, the buyer has to make up the differential in cash,” says Michael Feldman, a partner at the law firm Romer Debbas.
5. There are liens, issues with titles, or open permits
You can’t close on a co-op or condo apartment where there is an open tax lien. This happens if the seller has unpaid municipal charges, including maintenance and real estate taxes.
A title company won’t insure the transaction if the condo seller has outstanding real estate taxes. What typically happens is that the tax lien is paid out of the proceeds at closing. A discharge is then generated by the IRS so the buyer and lender can get title insurance. So while a lien issue can generally be resolved, it could delay your closing.
Open permits can be a concern for lenders because of the possible safety risks of work not being up to code. However, attorneys often reach a workaround in these situations where money is put in escrow to incentivize the seller to deal with the open permits.
6. The building’s insurance has lapsed
Banks want to see if the building’s master insurance policy conforms to Fannie Mae and Freddy Mac guidelines. This is rare but can typically happen on new construction projects. A solution would be to get a sponsor to increase the coverage to get the deal closed.
The bright side is that if you’re working with a buyer’s agent, we can help you navigate these waters. We can help you work with your bank, or even find a new one, to get you the mortgage you need to own your perfect slice of Brooklyn.
If you’re interested in learning more about the buying process, download our free Buying Into Brooklyn Ebook. We share a ton of valuable resources to demystify the buying process and help you become a Brooklyn home-owner.