Condo Buying Guide: Obtaining a Mortgage
If you’re like most homebuyers, you’ll need to obtain a mortgage to finance your condo purchase. The rules for condo loans vary between FHA loans and conventional loans, but either way, the lender will evaluate your creditworthiness – as well as the fiscal health and physical condition of the entire development where you want to buy.
In general, you’ll need a FICO credit score of at least 580 to qualify for a FHA loan and a score of 620+ to qualify for a conventional loan. Lenders also want to see a low debt-to-income ratio (43% is the highest, 36% is preferred), plus a solid credit report and employment history. (Check out How to Improve Your Chance of Getting a Mortgage.)
Condo Association Qualifications
What makes condo loans so challenging is that, unlike other mortgages, the condo association also has to qualify in order for your mortgage to be approved. You have little to no control over this aspect of the lending process. Lenders follow guidelines from the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. FHA rules stipulate that:
- The condo must be included on the FHA-approved condominium list, according to HUD requirements. If it’s not on the list, you need to find conventional financing.
- At least 80% of all FHA loans in the complex must be for owner-occupied units.
- At least 51% of the units must be owner-occupied.
- The project must have been completed for at least one year, with no pending additions or phases.
All lenders, whether for FHA or conventional loans, will likely turn down loans if the condominium association shows questionable financial health. Lenders especially want to see:
- at least 85% of HOA dues paid on time
- adequate and appropriate insurance
- adequate budget reserves
- no pending litigation that could result in costly legal fees and lawsuits
- no anticipated special assessments
When a condo is identified as non-warrantable, it means that Fannie Mae and Freddie Mac won’t buy the loan. That’s a problem since Fannie Mae and Freddie Mac buy nearly all conventional loans. Adding to the trouble: For the condo to be considered for a government loan (such as FHA), it has to be on the FHA-approved condo list – and odds are if it’s non-warrantable, it’s not on that list.
In general, a condo (or co-op, for that matter) is considered non-warrantable if:
- The project is not completed.
- The developers haven’t turned over control of the HOA to owners.
- The community permits short-term rentals.
- One person or entity owns more than 10% of the units.
- The majority of units aren’t owner-occupied.
- The project is involved in any type of litigation.
- A high number of units are delinquent on HOA dues for more than 60 days.
Non-warrantable condos are tricky to buy, but if you still want one, your only options may be to:
- Pay cash.
- Buy it using seller financing (land contract).
- Work with a small bank or credit union to get a portfolio loan – sometimes called a “common sense” loan.
Starting the Process
No matter which type of home you buy, the mortgage process begins with pre-qualification. To get pre-qualified, you’ll meet with a lender and provide financial information so the lender can provide a rough estimate of how much money you can afford to borrow.
The next step is pre-approval, during which time the lender checks your credit and verifies your financial and employment information.
Once you find a condo and make an offer, the mortgage loan application process begins.
If all goes well with the loan processing, you can head to the closing table and take title to the property. (Take a closer look in Mortgage Basics: A Tutorial.)
Condo Buying Guide: Conclusion