Mortgage Guide: Tenancies-in-Common (TIC) Versus Condo

The New York Times recently reported that it is difficult for Tenancies-in-Common (TIC) homeowners to obtain mortgage financing in the current lending environment, and that as a result, may are trying to convert their properties to condominiums. As I’ll explain below, however, this strategy is fraught with complications, and might not actually make it easier to obtain a mortgage.

Tenancies-in-Common (TIC) refers to a type of home-ownership in which a property has been segmented into fractionally-owned units. The purpose of this strategy is to increase affordability; whereas an entire property might be prohibitively expensive, individual units might be bought and sold for more reasonable prices. For legal reasons, however, “T.I.C. apartments share one deed for an entire building, creating co-ownership of the whole property.”

Moreover “To secure financing, many T.I.C. buyers obtained ‘fractional mortgages,’ a nontraditional loan that allowed them to finance their part of the building.” Unfortunately, the bursting of the housing bubble laid bare the problems of such an approach. First, there are very few lenders which are still willing to offer these types of mortgages. In addition, since the entire property is fractionally-owned, a default by one borrower can expose the other borrowers/unit-owners to foreclosure. Because of this added risk and the lack of individual control, such properties are often appraised for significantly lower values. As a result, many borrowers are trying to convert their units into condominiums. This would give them legal ownership of their unit and and the ability to obtain financing separately from the property’s other residents.

While this strategy might increase the property’s valuation and/or make it easier to sell, there is no guarantee that mortgage financing will be easier to come by. That’s because Fannie Mae and Freddie Mac have altered their lending guidelines, and are moving to disqualify nearly 20,000 properties nationwide from being eligible for mortgage financing.

According to the new guidelines, “Condo associations are required to set aside 10 percent of their budgets for maintenance and ‘reserves’; and new developments are ineligible for Fannie-backed financing unless 70 percent of their units have sold or are under contract (the threshold used to be 51 percent)….at least 50 percent of a building’s units belong to owners who occupy their units, and that no more than 10 percent be owned by a single investor.” In addition, if a significant portion of the owners in one building are delinquent on their mortgages, other potential residents will find it difficult to obtain financing.

In short, new lending guidelines for multi-resident properties are becoming more stringent. Home-buyers need to understand this when shopping for a home, and should seek to line up financing concurrently with shopping for a home. Likewise, they should understand that ever-changing rules might make it difficult to sell the property in the future, and/or might lead to lower valuations.