Document Collection for Condo and Coop Financing

Document collection is one of the most tedious aspects of purchase financing or refinancing a condo or coop.  It is also one of the most important.  The documents required provide information to the lender and to other secondary market partners, like the Federal National Mortgage Association or Fannie Mae and the Federal Home Loan Mortgage Corporation or Freddie Mac, that the project sufficiently satisfies project risk guidelines.  This means, among other things, that the association running it has been operating in a financially sound manner; that the structure has been maintained and that there is sufficient insurance in case of unforeseen circumstances.  Let’s look at exactly what documents address these concerns.

What documents are included in condominium or cooperative purchase financing, and why are they needed?

In most cases, the documents collected are based upon the requirements of the lender.  However, in situations where either Fannie Mae or Freddie Mac or other secondary market partners are involved, there may be a specific set of documents required to be reviewed.  In both cases there are four basic documents that are reviewed to determine the condition of the project.  They are:

The condo or coop questionnaire

Questionnaires vary in style and information requested but most contain basic sets of questions that most lenders need answered to determine lenders’ internal project approval and/or secondary market approval. 

Questionnaires ask basic information about the project, such as the correct and legal name of the project, address, and tax identification number.  Other information sought are project finances and financing, special assessments, and other information about the financial well-being of the condo or coop.  Also included are questions about the structural integrity and safety of the project, including the last date of the most recent inspection and the findings from that inspection.  The most recent Fannie/Freddie Condominium Questionnaire (Form 1076) can be found here.

Essential financial documents for condominium or cooperative purchase financing

The current operating budget and in many cases the most recent project financial statements are reviewed as a way of evaluating the financial health of the project and how efficiently the Condominium Association or Cooperative Board maintains the finances of the project.  For most associations, a certified public accountant issues an annual financial statement which audits the accounts of the project and issues a report of the findings.  The financial statement is usually certified to be accurate which borrowers, purchasers, lenders, and other institutions use as accurate, and most important, independent proof of a project’s financial health.  While Fannie Mae and Freddie Mac do not require financial statements as part of their requirements, financial statements are usually requested by lenders who are originating the loan. 

There are some projects that may be small or are unable for some reason to have financial statements created.  In those cases, other forms of proof of the financial health of the condominium or cooperative are requested and may be accepted.

Understanding the importance of a master insurance certificate in condominium or cooperative purchase financing

The Master Insurance Certificate is not the insurance policy secured by the condominium or cooperative unit owner or purchaser.  It is the insurance policy that covers the entire project.  The Master Insurance Certificate should indicate appropriate coverage that will help determine if the project is properly and fully protected against unanticipated events or perils that may occur.

In most cases the Master Insurance Certificate must show which insurance companies cover the project, with their NAIC numbers.  Because a project has several different components to it, there might be multiple insurance companies and/or policies covering the project.  For example, a project needs to have coverage for the property, coverage for the company or organization that manages the project, and other coverage for fire, flood, and other perils depending on the project’s location.  For a multitude of different reasons, these different coverages are not always covered by one insurance company.  Fannie Mae has specific insurance requirements that can be reviewed starting in Part B7 of the Fannie Mae Single Family Selling Guide.

The Master Insurance Certificate must show the amount of coverage. There are certain coverage amounts that must be in place to protect the project, depending on the lender and the secondary partner. 

Lastly, and perhaps obviously, the insurance coverage must be current, and the certificate of insurance must indicate that the policy has not lapsed.    

What other documents might be needed for condominium or cooperative purchase financing?

There are numerous other documents that can and often are required, depending on the lender or the secondary market partner.  The governing documents, which include the Articles of Incorporation, the offering plan, by-laws, budget, and others could be required by the lender or secondary market partner to determine the status of a condominium or cooperative project.   Sometimes an answer on the questionnaire does not match what is found in the financial statements or other documents which can lead to a situation where more information or other documents might be required.

Why are condominium or cooperative purchase financing documents necessary?

The easy answer as to why these documents are required is: to protect everyone and every institution involved in a condominium and cooperative project.  Condos and coops have many components that are unlike single family homes.  Condo and coop unit owners share walls, amenities such as fitness centers or pools, and space with each other as well as, in some cases, with retail and commercial owners.  The documents required are used to determine that all of these components are financially and structurally sound and being managed in a way that is beneficial to lenders who finance in such projects and secondary market partners that purchase the financing from some of those lenders.   

Project Risk Evaluation Partners (PREP) has the experience and expertise to know which documents are needed and how to interpret them.   PREP provides document collection, review, and risk analysis reports for lenders who portfolio and for secondary market partners such as Fannie Mae and Freddie Mac.