Know the game

When it comes to live/work mortgages, by far the most important thing is working with lenders who know the market. Livework World hears from the experts

‘Even in the gloomiest days of the real estate market last year I was still getting a very healthy flow of phone calls from people interested in live/work units,' says vice president and loan officer at Golf Savings Bank, Matt Johnson. ‘Because the consolidation of live and work is so valuable, cost-efficient and attractive a lifestyle - in the darkest days of the economy people were finding that even more attractive.'

Matt is one of a small but growing number of loan officers who know the live/work mortgage market inside out. What would his advice be to someone buying their first live/work property?

‘The primary thing - more so than in a typical home purchase - is it's critical for buyers to understand what they're dealing with, and how to engage lenders in that conversation,' he says. ‘There have been a number of occasions where people have been dealing with otherwise very qualified loan officers with good, solid lenders who just don't understand the product or what they're going to encounter once they have an appraisal - when a bank comes to understand what it is they're being asked to finance.'

If the lender doesn't understand the product, they probably won't understand the challenges of how to fit it into a loan program, he stresses. ‘So one could proceed assuming everything was fine and be quoted interest rates and payments, when it will ultimately have to change course - people could make their buying decision based on an "understandable misunderstanding".'

He cites the example of people who've gone back to loan officers they know and trust from previous transactions who, despite the best intentions, have not understood the challenge of trying to use a conventional loan program on a live/work. ‘They think "hey, a town home's a town home"' and try to do a normal loan,' he says. ‘Buyers need to be educated and ask the right questions.'

It may sound like odd advice, he says, but it could be a good idea to consider lenders recommended by the developer. ‘Often buyers are resistant to that - they want their own guy. They don't see how it can be in their best interests, but here it may uniquely be so. At some later point it may become something that isn't quite so niche, once there's enough product out there.'

Does he detect any sense of that starting to happen - is live/work getting mainstreamed? ‘There's certainly been a lot of condominiums with live/work on street level, in addition to single-family town home live/works,' he says. ‘There's also a big distinction there between condominiums and town homes, and buyers need to factor that into the conversation with the lender as well. There are different guidelines on single family and condos, whether there's a live/work element or not. Is it all one legal property? Could it be considered entirely residential but work-friendly? It's a grey product in many ways.'

There are three relevant categories of loan, he explains. ‘Firstly there's Fannie Mae and Freddie Mac, the agencies that buy the loans and create the underwriting guidelines - so whether it's an actual Fannie Mae loan or not, their guidelines drive what a lot of what lenders nationwide do, because they know they're well thought-out and based on research. There will be lenders who aren't trying to make a Fannie Mae loan who will adhere to the general principles that Fannie Mae put forth.'

The second is the Federal Housing Administration, or FHA. ‘It's a different set of guidelines but the same theme in that it's nationally recognized and FHA loans are underwritten the same way in every market throughout the nation.'

The third and more ‘nebulous' category, he says, is portfolio loans - lenders that set their own guidelines. ‘They don't necessarily adhere to Fannie Mae or FHA guidelines because they're not intending to sell their loans to those agencies. They may mirror their requirements in many cases, but they may also show flexibility. That may well be why they have the program to begin with - its whole existence might be to accept good quality loans that fall outside Fannie Mae or FHA guidelines.'

Someone who specializes in these portfolio loans is Anne Curran of Washington Federal. ‘We're a unique lender, a portfolio lender,' she says. ‘I'm one of a kind in that all the loans that I originate I keep here at the bank, so I'm not subject to the secondary market and their rules, but the secondary market, of course, is the largest potential source of financing. It is complex doing a live work, and guidelines can vary based on the project and how many units there are  - are they talking about four or are they talking about 20? For us being a portfolio lender, we look at it case by case. What's the scenario, what's the project like? We don't have black and white rules.'

Speaking of which, what about that thorny - and crucial - issue of floor space, of ‘live' versus ‘work'? ‘Unfortunately, if the lender has a rigid requirement that workspace be no more than x percentage of square footage, then that will be 25 per cent,' says Matt. ‘Many of these units are three stories - main floor commercial, top two floors residential - which obviously means they would be one third and two thirds, not 25/75 per cent. It creates a scenario where it's left to a bit of interpretation by the appraiser and the lender to determine what percentage is commercial and what is residential. That's another layer to the expertise on the lender's part - it takes a degree of coaching, saying "I need you to identify the appropriate percentage". There's interplay between the lender and appraiser to fully understand and demonstrate those percentages, to make an accurate decision about that unit and that loan.'

However there are avenues to put a loan into the Fannie Mae portfolio even if it exceeds 25 per cent, he says, provided that it's an owner-occupied transaction. ‘But again there can be issues if an individual underwriter doesn't understand the units or has never seen one before, which is not uncommon. Appraisers can get tripped up over "this is commercial, I can't appraise it" or "what's the commercial value and what's the residential value?" instead of just "what's the total value?" We've even had underwriters get the report and say "commercial - we can't do this at all".

Lack of understanding aside, and despite interest from live/work buyers holding firm, the mortgage market as a whole has obviously been deeply affected by the economic downturn. ‘Issues that may not have been as profound two or three years ago have become more profound in even the simplest of transactions,' says Matt. ‘Scrutiny of the collateral, the property, the borrower and every nook and cranny have become more tight. Two or three years ago lenders might have been more pliable with things like live/work, but at the moment people are a little shell-shocked so it could be harder to get people excited about branching into a new area.'

Ultimately there's no such thing as a specific live/work mortgage - they're standard mortgages, subject to underwriting guidelines. ‘One exception to that is Fannie Mae has a provision for mixed use properties in their code, that basically says as long as the unit is to be owner-occupied - the person living and working in it is the same - they don't have that careful distinction of 25 per cent,' he says. ‘They remove that and say "It's mixed use, it's fine - they're living and working there, we don't need to get into the percentages".

But the golden rule remains to make sure you're dealing with someone who knows the live/work market. ‘There's a lot of very good loan officers who absolutely have their clients' interests at heart, but just haven't had the experience of live/work and how to navigate it all.'