Getting a mortgage on a condominium unit has its challenges. Strict standards make it difficult to qualify for a condominium loan, and loan costs may be higher on a condo than for other types of real estate. Typically, for example, loan interest rates are higher for condominiums than for single-family homes. Loan requirements vary by type – such as Federal Housing Administration (FHA) or conventional – and by individual lender.
Economic and credit crises of the late 2000s have led to tighter restrictions on all mortgage lending. Condominiums in particular are viewed as risky by the lending industry because some of their biggest losses came from defaults on condominium loans. In fact, some lenders make a point of rejecting condo loans altogether.
As with any mortgage, a condominium buyer must first qualify for the loan. In addition to having excellent credit and a steady source of income, certain borrowers may be required to make up to a 25% down payment, depending on the type of the loan. Lenders typically have tougher loan-to-value ratios (LTV) for condo loans. LTV is how much a property is worth compared with how much money is owed on it. If a buyer makes a 20% down payment on the condo, for example, the LTV would be 80%.
Condo Association Qualifications
What makes condo loans so challenging is that, unlike other mortgages, the condo association also has to qualify in order for the mortgage to be approved. The borrower has little to no control over this aspect of the lending process. Lenders follow new guidelines from the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. Fannie Mae requirements stipulate that:
- More than 50% of the condominium units must be owner-occupied.
- No single investor can own more than 10% of the units.
- No more than 15% of owners can be delinquent on monthly dues.
- All planned amenities must be finished if the development is more than one year old.
- Borrowers who make a down payment that is less than 25% will pay either an extra 0.75% of the loan amount at the closing or an interest rate that is approximately 0.25% higher.
- Adequate and appropriate insurance
- Adequate budget reserves
- No pending litigation that could result in costly legal fees and lawsuits
- No anticipated special assessments
Condominiums that are not approved for FHA or Fannie Mae financing are referred to as "non-warrantable" and leave few options for borrowers. Buyers can either pay cash or try to secure a loan through a local bank. In this situation, borrowers should expect very high down payments of potentially 50% or more and significantly higher-than-average interest rates.
Since it is in the best interest of all unit owners that interested buyers can obtain financing, condo owners can ask the development's management company if their development is FHA or Fannie Mae approved. If the development is not approved, owners can contact a local lender to initiate the process for obtaining approval.
Starting the Process
If a buyer already has an approved property in mind, the loan process may take as little as 45 days.
As with other mortgage types, securing a condominium mortgage begins by working with a lender. The lender will determine the amount of loan that the borrower can afford (or the amount that he or she is prequalified for) using calculations based on the borrower's income and debt amounts.
The lender must also qualify or reject the condominium association. Local lenders often know which associations are approved by FHA or Fannie Mae. Buyers can ask the lender which local associations are approved for FHA loans, which typically demand the lower down payment. If not, the buyer can ask the lender which associations meet the Fannie Mae or Freddie Mac guidelines. The development management should be able to provide a condo questionnaire that provides information regarding condominium fee delinquencies, insurance and other factors that may affect loan eligibility.
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