Last fall, real-estate agent Scotty Elyanow, with the Corcoran Group, got a solid gold listing in Manhattan’s West Village, one of the most expensive neighborhoods in the country. Mr. Elyanow put the one-bedroom co-op, with a marble kitchen and 11-foot ceilings, on the market at $1.1 million.
But the apartment also had unusually high monthly fees: $2,500, in a building with no amenities other than an elevator. Even after the price was lowered to $950,000, buyers balked at monthly fees about $1,000 higher than in comparable apartments (the building has few units plus an unusually high tax burden, Mr. Elyanow said). The property is currently in contract—Mr. Elyanow declined to say for how much—with a cash buyer.
Monthly charges, whether condominium or homeowners association fees or maintenance (the term used with cooperative apartments), can make a big impact on a buyer’s ability to qualify for a loan.
All common charges have the same impact on the debt-to-income ratio.
“Condo charges are reviewed right up front,” along with the price of the property in question, said
Bob Donovan, who oversees consumer lending sales in the Philadelphia to New York corridor.
“The monthly housing obligation includes principal, interest, taxes, insurance and common charges,” said Guaranteed Rate’s chief operating officer Nikolaos Athanasiou. Condo fees typically cover amenity charges. Real estate taxes are charged separately. In co-operative apartments, the real estate taxes are often part of the monthly “maintenance” charges, which is why part of that fee can be tax deductible. It all gets added up and calculated as debt in the debt-to-income ratio, which helps determine how much someone can borrow, lenders said.
Lenders have two considerations when a customer wants to borrow for a property with common charges. The first is whether the borrower will be able to make the monthly payments. The second is, in the event of a default, whether the lender wants to have the property—with its attendant common charges—on its books.
“If the borrower is extraordinarily well qualified, we might be more liberal,” even if the bank has some qualms about the building, Mr. Donovan said. Buildings with high common charges due to unusually high taxes, financial mismanagement or other problems might get a thumbs-down from a lender. Another negative: Weird amenities that the marketplace doesn’t value, Mr. Donovan said.
A plethora of new luxury condos in cities including New York, Miami and Los Angeles come with a dazzling array of amenities matched only by their dazzlingly high common charges. High monthlies for high luxury don’t necessarily turn off a lender, said Eric Schuppenhauer, Citizens Bank president of home mortgages. The bank has a simple system for determining the value of things like residential doggy day cares, Pilates gyms and golf-simulator lounges: It examines the market activity on owner units.
If units are selling quickly at market price, and if there is “robust leasing on rental units,” then the bank has a good sense that the marketplace values what the building offers, said Mr. Schuppenhauer.
Nevertheless, Citizens Bank has had some mortgages derail midstream because of unexpectedly high common charges, said Mr. Schuppenhauer.
Problems most commonly occur when “someone comes to us with a new building we’ve never lent on and they don’t have all the info available in the application,” Mr. Schuppenhauer said. The borrower might have believed they qualified for the loan because they lowballed how much the common charges would be when they sought a mortgage prequalification. Once the bank sees the real figures, occasionally “the debt-to-income is too high and we can’t do it,” said Mr. Schuppenhauer.
To avoid unpleasant surprises, here is some advice from lenders about common charges:
• Ask a neighbor where they got their loan. Lenders often specialize in a building, getting to know its financial, management and ratio of renters-to-owners well, said Mr. Schuppenhauer of Citizens Bank. That can make it easier and faster to get an approval.
• “Buyers should always validate the common charges with their real-estate agent or the condo sales management office,” said Mr. Athanasiou of Guaranteed Rate. “They should do so before going into contract and understand how it factors into their housing ratio (debt-to-income), which ultimately limits their borrowing power.”
• Although sometimes common charges cover costs that would ordinarily be billed separately, such as cable or utilities, executives at Bank of America, Citizens Bank and Guaranteed Rate said all common charges have the same impact on the debt-to-income ratio.