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Increasing number of NYC buildings aren’t up to snuff for mortgages

Everything was going right, and the buyer was ready to make a move.

He had been preapproved for a mortgage and had signed a contract for a $560,000 one-bedroom apartment at Wellington Tower, a condo on the upper East Side.

But when it was time to get a mortgage, it was no go. The problem: While the buyer was fine, the building did not meet the lending criteria of a number of banks.

“Everyone was upset and surprised,” said Howard Morrel, senior vice president at Brown Harris Stevens, who represented the seller – the building’s sponsor – as well as the buyer. “We had one of the best mortgage brokers in town. No luck.”

It wasn’t the first time lenders had said no to mortgages for buyers looking to purchase at Wellington Tower. Just a few months before, Morrel ran into the same problem with the buyer of a studio. He walked.

Low interest rates and the high cost of rentals in the city have many locals looking to jump on their first purchases.

But first-timers, as well as sellers and buyers who haven’t been in the market for some time and those looking to refinance may be in for a surprise: Buildings have to pass the sniff test, too, and these days it’s harder than ever to do.

“The building is now of equal importance to the unit itself,” said Jonathan Miller, CEO of real estate appraisal firm Miller Samuel.

Blame the real estate meltdown, which prompted Fannie Mae, Freddie Mac and banks to toughen their guidelines as it relates to buildings.

“Fannie, Freddie and the banks need to ensure that the buildings don’t have financial difficulties,” said Jan Scheck, branch manager at DE Capital Mortgage, an affiliate of Wells Fargo.

The reason: In the event that a co-op or condo owner defaults, the bank might have to sell the property. If a building is facing hardships, it will be that much harder to find a buyer.

Some of the hot buttons for lenders include buildings that do not have sufficient reserves in their budget to deal with future repairs; potential uninsurable litigation; too many units not occupied by owners in a building, or a new building with too many unsold units.

At stake for buyers is losing out on a unit they’ve fallen in love with, or possibly even forfeiting a down payment.

Sometimes obstacles can be overcome. Buildings can work out their issues and address shortcomings.

“There are ways to find exceptions and waivers, but it takes time and often happens in an inopportune time,” Scheck said. “Maybe your current rental lease is expiring. Then what do you do?”

Morrel dug into the problem at Wellington Tower and learned that the building had a couple of red flags. One of them was the building’s budget did not have a line item showing 10% of its expenses going into a separate reserve.

“It was a bookkeeping nuance,” Morell said.

He brought together the condo board, the sponsor and Chase. The bank explained its guidelines to the board and they worked to make the building compliant. In the end, the buyer was able to get a mortgage.

“We are seeing a whole lot more of this than we used to,” said Dylan Levy, a lending manager at Chase.

“When looking to get a mortgage, it’s important to understand that your financials need to be in order, but the building needs to be in good health and meet certain requirements as well.”

Is it rock solid?

Find the experts: Go to a reputable mortgage banker who understands the nuances.

Talk to loan officers: “Check to see if your building is on the banks’ approved list,” said Jan Scheck of DE Capital Mortgage. “If it’s not, you might experience challenges.”

Keep your ears open: “Be aware if people in your building are experiencing problems,” Scheck added. “Ask the managing agent of your building.”

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