Buying a Condo Unit With a VA Mortgage
VA Loan: Buying a Condo Unit
If you are looking for a condominium unit to purchase with a VA loan, there are some important aspects of the condo loan process you should be aware of. VA mortgages have some unique rules that may affect your choices. Knowing your options, your rights, and the general rules associated with VA condo loans can help you in the loan planning process.
The VA Lender’s Handbook, HUD 4000.1, states clearly that VA mortgages may be used, “to purchase or construct a residence, including a condominium unit to be owned and occupied by the veteran as a home.” VA condo loans feature the same zero-down options as other VA mortgages.
VA Condo Loans are offered by participating lenders, but not all lenders who approve VA mortgages may offer a condo loan. Much depends on the demand in the housing market you are in, the nature of the condominiums in the area, and whether or not the project meets VA standards.
Condo Purchases Are Unique
Whether using a VA loan or not, borrowers who choose condo units should know that buying such a property comes with some added considerations you may not be subject to when purchasing a typical suburban home, manufactured home, or even a farm residence.
What kinds of considerations? The fact that a single condo unit is part of a larger community means that certain common areas may require the group to pay for upkeep and maintenance. The shared roof is an excellent example; if you buy a unit in a condo with six living units, all six tenants are likely to have to pay for repairs when the time comes.
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This often means that there is a condo owner’s association that votes on such issues. You may be required to join as a condition of purchase, and in such cases, you’ll want to know what the organization’s bylaws and covenants are. This will be important for the VA loan in ways we’ll examine below.
Remember that a condo project may or may not involve mixed-use or mixed-zoning residential properties. In cases where there is a combined residential and non-residential project, it must be “primarily residential” in nature according to the VA. The Department of Veterans Affairs does not have regulations about specific zoning issues, instead, it defers to the local authority. If the condo does not meet the state regulations applicable to it, the project cannot become VA-approved.
VA Condo Approval
Like other government-backed mortgage loan programs, VA condo loan rules include a requirement that the condo project be on or added to the VA-approved list. It’s the lender’s responsibility to request additions to that list where appropriate.
VA Pamphlet 26-7, the VA Lender’s Handbook has an entire chapter dedicated to condo loan procedures; it includes the following instructions to the lender for adding a project not currently on the VA’s list:
- The lender must submit a written request to the Department of Veterans Affairs for the condo project to be added;
- The lender must submit the condominium’s “organizational documents”
- The submission must be reviewed by VA compliance officials prior to approval.
In cases where a condo project is on other government-backed loan program approval lists, it may only be necessary to have that approval reviewed and applied for the VA program.
VA condo unit approval is not the same as a VA appraisal nor does it act as such. The condo approval process is more about determining that the project meets VA standards, that the bylaws don’t contain restrictive clauses that are contrary to VA loan standards and policy, and that the project meets state laws and other requirements.
In other words, when the condo project is added to the VA approved list, or the lender acknowledges that the project is already on the list, a VA appraisal is still required as a condition of loan approval.
Condo Approval Caveats
If a project is already on the VA-approved list, it’s not necessary to jump through all the hoops required to get the approval done. But in cases where approval is needed, there is a major caveat. It’s one borrowers and sellers should understand going forward.
When the VA approves a project, it does so as mentioned above in part by reviewing the condo’s documentation, bylaws, etc. It is assumed that this documentation is current at the time of review. But what happens if there are changes, updates, or modifications to the rules after the condo project is VA approved?
VA Pamphlet 26-7 Chapter 16 states, “VA approval of any amendments to the declaration, bylaws, or other enabling documentation is required while the declarant is in control of the homeowner’s association. A written statement signed by an officer of the Association’s Board of Directors and submitted with VA Form 26-1844, is required as evidence of approval.”
This could be interpreted as protection against VA-compliant bylaws that could be amended after initial VA approval where the changes don’t meet VA standards. However, VA loan rules in this section add that approval is “not required” for condo project amendments “which annex additional phases to the condominium in accordance with a development plan previously accepted by VA.”
What Causes A Condo To Be Rejected By The VA?
There are a number of technical, behind-the-scenes reasons why a condo project might not meet VA approval. One would be that the project does not meet the legal requirements established by the state the condo is in.
Another is that the condo project is located in an area the VA won’t approve loans in. But the issues that are most relevant to the borrower in this area involve restrictive covenants or clauses in the condo owner’s association documents or other paperwork relevant to the project.
What does the term “restrictive clauses” mean? Simply that the condo project wants all owners to agree in a legally binding document that certain rights are subject to prior approval, or subject to “alienation”.
The VA Lender’s Handbook in Chapter 16 states that the following must not be present in any agreement for the buyer:
- Right of first refusal;
- Right of prior approval of either a prospective purchaser or tenant;
- Leasing restrictions which amount to unreasonable restrictions on use and occupancy of a unit;
- Any minimum lease term in excess of 1 year.
Notice a pattern? Most of the above refer to conditions placed on the owner that restrict her ability to freely use, transfer, or otherwise dispose of the property. The “right of first refusal” is basically a clause that prevents the individual condo unit owner from selling the unit to anyone they want. The condo owner’s association may in such cases reserve the right to approve or deny the transaction.
That is in direct contradiction to VA loan rules which state that the owner must be free to sell, transfer, or otherwise use the property as they see fit as a primary residence.
What To Know About VA Condo Loans
Buying a condo unit means participating in a collective of sorts. You may have rules that dictate what color you can paint exterior walls, the kinds of public-facing adornments to windows, doors, or porches, and you may be required to attend condo owner association meetings to decide how to pay for maintenance of common areas, parking lots, etc.
It’s true that some typical suburban neighborhoods also feature homeowner’s associations, but when buying a condo you may find them far more commonplace. There are dues associated with such organizations and those who do not meet their financial obligations to the association may be financially liable depending on the terms of the legally binding agreement you sign.
These are important issues to know, don’t be taken by surprise when you are shopping for a new place to live. You’ll want to understand what to look for in the condo owner’s association documents in terms of your obligations and your rights as the owner of the unit in a given project.
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