Mortgages And Liens

The mortgage process for a condominium unit is generally the same as for a single-family house, because the interest acquired is a fee simple interest.  However, unlike a single-family house, there is no need for a survey of property for a condominium.  All encumbrances on the property shall be cleared before the mortgagee makes a loan on the unit.  However, the number of units owned by the developer will influence the mortgagee and will also concern the purchaser.

Where the developer owns more than 50 percent of the voting interests, the developer will have a right to control the operations and the individual unit owners will have very little right to influence decisions.  In such situations lending institutions may become reluctant to make a loan on the unit.

Of the different kinds of mortgages available to condominium purchaser, the important ones are the conventional mortgages and Federal Housing Administration (“FHA”) condominium mortgages.  A conventional mortgage is a mortgage by which the borrower transfers a lien or title to the lending bank or other financial institution.  These kinds of mortgages are not backed by government insurance.

A conventional mortgage features a fixed periodic payment of principal and interest throughout the mortgage term.  This can be the reason why conventional mortgages dominate the condominium financing scene.  On the other hand an FHA mortgage is a mortgage that is insured fully or partially by the Federal Housing Administration.  Pursuant to the National Housing Act of 1961, the FHA is authorized to insure mortgages on individual family units in multifamily structures.

The FHA loans are specifically geared toward those who purchase housing units in a condominium building.  Section 234(c) of the FHA provides insurance for this kind of housing.  The Section 234(c) program insures a loan for 30 years to purchase a unit in a condominium building. It requires that the building must contain at least four dwelling units and can be comprised of detached and semidetached units, row houses, walkups, or an elevator structure.  This FHA insurance also helps low and moderate-income renters who wish to avoid the risk of being displaced when their apartments are converted into condominiums.

Of the many types of mortgage insurance offered by the FHA, FHA Condominium Loans are designed to encourage lenders to extend affordable mortgage credit to those who have non-conventional forms of ownership.  A creditworthy person who meets FHA underwriting criteria and who intends to occupy the condominium unit as his/her principal residence is eligible to apply.

Apart from individual mortgages, blanket mortgages can also be insured.  A blanket mortgage is a mortgage that covers two or more pledged properties to support a debt.  To be eligible for insurance, a blanket mortgage on any multifamily project of a mortgagor shall involve a principal obligation in an amount not exceeding 90 per cent of the amount will be the replacement cost of the project when the proposed physical improvements are completed.   It shall also involve a principal obligation in an amount not exceeding, for such part of the project as may be attributable to dwelling use and not exceeding an amount equal to the sum of the unit mortgage amounts assuming the mortgagor as the owner and occupant of each family unit.

Pursuant to 24 CFR 234.26, a mortgage shall not be eligible for insurance without review and qualification of the followin:

  • Location of family unit,
  • Plan of condominium ownership,
  • Releases,
  • Certificate by mortgagee,
  • Conditions and provisions,
  • Limitations on conversion of rental housing to condominium use,
  • Projects covered by an insured or Secretary-held mortgage, and
  • Projects not covered by an insured or Secretary-held mortgage.

In order to close a loan, the purchaser will need a clearance document from the condominium association.  The association shall grant clearance in the form of a written document thereby approving the transaction.  A fee for the transfer of an interest shall be paid at the closing and the management shall provide a letter to the lender detailing the status of maintenance fees.

A condo lien is a formal notice filed against a condo unit, creating a public record that a stated sum of money is due to the condominium from this unit and this prevents the unit from being sold.  A lawsuit is a suit filed in court by which the condominium seeks to have the court force the unit owner to pay money to the condominium.  A lien can be followed by a lawsuit, or a lawsuit can be filed without a lien having been recorded.

Mechanic’s liens are constitutional rights guaranteed to the contractors.  A mechanic’s lien is a legal process which seeks to guarantee payment for contracted services rendered on an improved piece of property.  Without the mechanic’s lien, the contractor would have a limited number of options to enforce payment of the amounts owed.  Mechanic’s liens exist to secure payment for services, labor and material rendered on both personal as well as real property.

Depending on the laws of a particular state, contractors, subcontractors and suppliers can file a mechanic’s lien within a specified time period after the work has been completed and where payment has not yet been received.  A mechanic’s lien is both applicable to the structure above and the land under it.  The landowner shall not own a clear title, until and unless the debt is paid.

In United Brotherhood of Carpenters & Joiners v. Nyack Waterfront Assocs., 182 A.D.2d 16 (N.Y. App. Div. 3d Dep’t 1992), the court stated that a mortgage foreclosure action arising out of a condominium development project, while the contractor’s mechanic’s lien was invalid initially, it was nonetheless valid as to the latter phases of the project involving undeveloped or partially developed property.

Inside Mortgages And Liens