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Is it a two-family house or two condos? FNMA wants to know.

Posted by Rona Fischman September 10, 2012 02:09 PM

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Here’s a peculiar thing that one of my clients is facing.

He bought a second and third floor condo in a two-family house. The condo downstairs is rented to a stable, pleasant couple. He met with the other owner before buying and was comfortable with the situation. The owner downstairs said that she would be selling down the road. Down the road happened; she approached him about selling the downstairs.

Then a problem cropped up: Fannie Mae (FNMA) does not approve loans for a buyer who wants to own both condos in a two-family house. Fannie Mae would be perfectly happy approving a loan on this exact property, were it a two-family house. My client would qualify to buy it as a two-family, but not as two condos. Since he does not want to re-do the legal work to change the building back to a legal two-family, he is going to get his loan from a non-FNMA lender.

My client is daunted. It is a two-family house, physically, but he cannot purchase it with a Fannie Mae loan because it is now legally two condos. He would own the same exact house on the same exact piece of land.

My client wrote:

[The portfolio lender] can work with me, but it would be in the bank's portfolio, not a Fannie Mae approved deal.
The interesting thing I learned is that Fannie Mae does not sponsor mortgages where owner of one unit in a 2-family then buys other unit of 2-family. I asked [The portfolio lender] how this was different than one person buying a 2-family. [The portfolio lender] agreed it was a mystery with no reasonable answer --- but it seemed like she hadn't really considered it until I pressed her… But I am also curious if you understand Fannie Mae's position on my buying a 2-family (OK) vs. buying both units of a 2-family (not OK)

I answered:

FNMA does not handle condos in two-family houses often. They are common in Massachusetts, but mostly unknown elsewhere. So, the rules about condo associations that apply to bigger complexes are still in play in small associations here.

In a big complex, it is a bad thing for one person/company to own it all or even significant portion of it. When that happens, one person runs the show and can run the place into the ground. Also, if that one person goes bankrupt and stops paying the fees, the association goes to hell. It is also bad in a smallish association if one person owns two or three units out of six and then everyone else owns one. FNMA says no to that, too. Here in Massachusetts, in a three-unit association, if one person owns two units, the third unit won't meet FNMA approval. (This is a problem for developers. The early buyers are not in compliance with FNMA limits on investor concentration.) So, using that logic, FNMA won't allow you to own what is really a two-family house because that two-family house is legally a condo association with too much owned by one person (you.)

There is logic to FNMA. But it is still peculiar when you think about it. Have your run into this?

This blog is not written or edited by or the Boston Globe.
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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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