Getting a Mortgage for a Condo in 2019
If you’re considering buying a condominium, you’re in good company. Nearly 29 million condo owners have chosen to enjoy the pride of ownership without the pain of maintenance, knowing their monthly associations fees will pay for the upkeep and maintenance of the building they live in.
But getting approved for a mortgage on a condominium requires a few additional steps. It won’t just be your finances under scrutiny; your lender must also approve the organization the condominium is a part of. Until recently, even if you had great credit and plenty of money to put down, you could still be rejected if the condo association wasn’t financially sound.
The good news: Getting a mortgage for a condo in 2019 has become easier. There are more programs available and more flexibility for condominium associations to pass muster.
Here’s what you need to know.
How the mortgage process is different with condominiums
Getting a mortgage for a condominium requires the same beginning steps you take for any type of real estate. A loan officer checks your income, credit and assets and determines the best product for your purchase or refinance.
Besides evaluating your financial health, the lender needs to check the financial health of the condominium project. Unlike a single-family residence, a condominium has a lot of moving parts.
Condo communities have common areas like spacious lobbies, on-site gyms, rooftop decks and community meeting rooms. Generally, residents elect a group of people to make up the condominium association and are responsible for making decisions about the cost of maintenance and assessment for repairs and improvements.
The condo owners association collects monthly dues to help with maintenance, as well as pay for insurance to cover the amenities against losses that occur if someone is injured in them, or if the property is damaged in a fire.
Lenders look at the condominium association as a kind of business entity — and if that business is not being operated efficiently, the loans made to unit owners could end up in default. That’s why lenders also require a review of the condominium project for loan approval.
You need to know if you’re financing a “warrantable” condominium
If you’re considering getting a mortgage to buy a condominium, you’ll need to know the difference between a warrantable and non-warrantable condominium. You’ll also need to make sure your real estate agent understands the difference, so you’re not looking at condominiums that don’t have a prayer of being approved for normal mortgage financing.
This will also help you get accurate price quotes from lenders. Non-warrantable condominium financing is more expensive, requires higher down payments and may not even be offered by some lenders. If you’re comparing non-warrantable condominium pricing to warrantable financing, you’re comparing apples to cucumbers.
If the listing for the property you are buying indicates the property can be purchased using conventional, FHA or VA financing, that’s a good sign it’s a warrantable condominium. Other properties may be warrantable using Fannie Mae’s limited or full review process, but be prepared for a longer loan process.
Requirements for a warrantable condominium
If a condominium is warrantable, it simply means it meets the guidelines set by Fannie Mae, FHA or VA for mortgage lending. By understanding the requirements for a warrantable condominium that meets these guidelines, you’ll understand some of the risks of purchasing a non-warrantable condominium.
The financial stability of the project
When you purchase a condominium, you are sharing the responsibility for the maintenance of the property, along with the payment for all of the amenities and features the project may offer. A healthy project should have reserve funds to make repairs and take measures to ensure that other owners are paying their dues on time, so there is no shortage of funds needed to operate the project.
Here a few details of the factors lenders consider when determining whether a project is in good financial shape:
- No more than 15% of the total units may be 60 days or more past due on common area expense assessments.
- The association must have a minimum budget reserve of 10%, which is measured by dividing the annual budgeted reserves by the annual budgeted income.
- No more than 50% of the properties in the project can be investment properties.
Number of people who are living in a project as a primary residence
Lender guidelines require that a certain percentage of the properties be owner-occupied. This is especially true for FHA and VA lenders, since both programs only allow financing for primary residences.
A property that has renters is more likely to have deficits in their reserves as vacancies mean the monthly association fees for those units have to be absorbed.
Because there are more occupants in a condominium project than in a single-family home, there is more of a risk of lawsuits related to how the project operates or as a result of an injury sustained from inadequate property management. Corners may be cut to maintain a budget, but the consequences may be a lawsuit that requires the project use funds to defend itself.
The association is required to answer questions regarding any pending lawsuits so the lender can determine if the litigation is minor (such as a tenant damage dispute), or something major like an injury to a tenant in a common area.
Insurance coverage requirements
Condominium projects are required to maintain coverage against claims with minimum coverage requirements usually in the millions of dollars. Major damage to a home can be covered by a single policy, but since a condominium contains units owned by multiple owners, the coverage must be able to insure against losses that affect potentially dozens, if not hundreds of occupants.
These are the primary considerations when evaluating the soundness of a project for mortgage lending. If you purchase a property that doesn’t meet these standards (a non-warrantable condo), you need to understand the risks.
Risks of a non-warrantable condominium
May be harder to sell
Condos that aren’t on the approved lender agency lists may be harder to sell. Buyers may only qualify for Fannie Mae, FHA or USDA financing, and may opt for an approved condo to avoid any lending challenges.
Financing is more expensive
Alternative financing is available, but it will come with higher down payment requirements, and higher interest rates and costs. We’ll explore alternative financing options for non-warrantable condominiums in the next section.
The easiest way to get a mortgage on a condominium
All of the major lending agencies — Fannie Mae, Freddie Mac, the FHA, USDA and VA offer home loan financing options for condominiums. Fannie Mae, FHA and the VA have approved condominium lists, and if you’re lucky enough to find a condo in a preapproved project, your mortgage experience will be much easier.
We’ll start with the most flexible mortgage programs available for both credit and property qualifying for a condominium.
FHA financing for FHA-approved condominiums
Qualifying for an FHA loan for a condominium is no different from qualifying for the purchase of a single-family residence as far as your income, credit and assets are concerned. You’ll need a credit score of at least 580, a debt-to-income ratio around 43% and a 3.5% down payment.
When you’re looking for condominiums, there should be some information on the sale listing that tells you whether or not the property is FHA approved. If not, you can also use the
condominium search tool offered by the HUD (Department of Housing and Urban Development) and see if the project is approved, or has been submitted for approval.
If it is approved, then it should be fairly smooth sailing for your overall mortgage approval. If the project is submitted for approval or is not approved at all, there may still be ways for you to get the property using alternative lending or to get the condo board to get the project approval.
We’ll cover those options in another section later in this article.
Fannie Mae and Freddie Mac financing for Fannie Mae approved condominiums
Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® loan programs offer financing for condominiums with only 3% down payment, lower monthly mortgage insurance than what is required on an FHA loan and flexible options for down payment source and income. Like the FHA, there is a Fannie Mae-approved condominium list you can use to check whether the project where your condominium is located is approved.
If it is, then you can proceed with the full approval process similar to buying any other type of property.
VA financing for VA approved condominiums
One of the biggest benefits that active-duty military personnel and veterans of the military receive is VA home loan eligibility. Veterans can purchase a condominium in approved projects with 0% down payment, with minimum requirements that are more flexible than FHA or conventional mortgages.
The VA also has its own approved condominium list you can use to see if a particular project is approved. If it’s on the list, then you can proceed with the loan and have an appraisal ordered to purchase the property.
USDA financing for condominiums
The USDA also offered 0% down financing, but is designed to provide financing for low-income borrowers in rural areas. It allows for credit scores as low as 640, and debt ratios up to 44%.
The first thing you’ll want to check is the property’s eligibility for USDA financing. You can do this by using the USDA’s property eligibility tool.
Unlike Fannie Mae, FHA and VA, the USDA does not have an approved condominium list. If the property is eligible for USDA financing and is on the Fannie Mae, FHA or VA approved condominium list, then the condominium can be financed under USDA guidelines.
Are rates and costs higher for condominium mortgages?
Up until recently, there was a substantial markup on interest rates for buying a condominium. This was a knee-jerk reaction to the default rates on condominiums during the housing bust.
The fallout from having dozens of borrowers obtaining mortgages without verifying their ability to repay multiplied the losses to the point where lenders suffered huge losses in condo projects. With the ability to repay rules established by the Consumer Finance Protection Bureau, lenders have begun to ease up on the qualifying guidelines and have removed some of the risk pricing adjustments that made condo mortgages more expensive.
Private mortgage insurance may be a bit more expensive, and the appraisal is completed on a special condominium appraisal form that may cost an extra $100 more because of the additional data the appraiser has to provide regarding the condominium association of both your condo and the projects the appraiser compares with yours to establish an opinion of value.
Changes to the condominium approval process in 2019
One of the biggest obstacles to getting a condominium approved is the extensive documentation requirements required by the agencies. In the past year, the paperwork guidelines were eased, which may mean more condominium projects can be financed with Fannie Mae, FHA or VA loans.
Fannie Mae offers two types of reviews for condominiums — a limited review and a full review. The full review is similar to what FHA and the VA require, with detailed financial forms to fill out and legal documents to be provided.
The loan processor will usually obtain this information, although in cities or states where condominiums are more prevalent, lenders may have a dedicated condominium approval department that handles the collection of all the documents required.
A limited review can yield an approval with the completion of a simple questionnaire, and if you’re making at least a 10% down payment, there’s a chance the condo project approval process will be much easier. Fannie Mae is offering more of these limited review options to help borrowers with conventional approvals for condo financing.
Below are some of the highlights of the changes and what they mean to you.
|How Condo Guideline Changes Will Affect Your Mortgage|
|guideline change||What it means if you’re financing a condo|
|Manufactured home condo projects no longer require blanket insurance coverage||This makes it easier to get FHA financing on condominium projects made up of manufactured homes.|
|Detached home condo projects don’t require as much blanket insurance coverage||Some condominium projects are made up of individual single family residences that are run like condominiums. An FHA mortgage will be easier to get because of these changes.|
|Owner-occupied concentration can be as low as 35%||Another FHA change, this one allows for a well-run condo project to be approved even if 35% of the units in the project are investor-owned rentals.|
|Expanded recertification timelines for currently approved condos||FHA requires project approvals to be updated every 2 years. The new guidelines give a project an extra 6 months to be approved, which is good news if the condo you’re buying happens to be in that project.|
|Expanded eligibility for limited reviews||If you’re making at least a 10% down payment, a limited review allows the project to be eligible for approval with just the completion of a questionnaire.|
Alternative mortgage financing for non-warrantable condominiums
If you have money for a higher down payment, and don’t mind paying a higher interest rate, there are more alternative lending options in 2019 than there have been in recent history. Don’t worry, these are not the subprime loans of the housing boom and bust — the Consumer Finance Protection Bureau enforces legislation that requires lenders verify your ability to repay any loan made on any type of property.
Most of these programs will require at least a 20% down payment, and the rates will be significantly higher than standard conforming loan rates depending on your credit score. They may also require three to six months’ worth of payment reserves.
Alternative reverse mortgages also made their entrance onto the product rate sheets of several lenders across the country. Under the nomer “proprietary reverse mortgages,” these programs allow for seniors 62 and older to obtain a mortgage that pays them for the equity in their home, and now non-warrantable condominiums are eligible for financing.
Getting a mortgage on a condominium in 2019 is all about knowing the details about the condominium you’re interested in upfront. With the easing of guidelines for condo project approvals, you may find more projects popping up on the approved project lists for FHA, Fannie Mae and the VA.
Even if the property doesn’t make the approved condo project list for traditional financing, the growing array of alternative lenders are likely to have options, if you’re willing to pay a little extra.