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Refinancing a Condo: What You Need to Know

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Sorry, condo owners — refinancing your digs isn’t as simple as it is for those with single-family homes. These tips will help determine whether your place is eligible. If it is, refinancing your loan may be a good option, particularly if your credit score has improved since you purchased your home or if your current interest rate is high. You could trade your mortgage for a new loan with a shorter repayment timeline or even recast your mortgage over a longer period to secure a lower monthly payment. Whatever your situation, keep reading to prepare for your new home loan.

Refinancing hurdles for condos

Refinancing a condo requires many of the same steps as refinancing a single-family home. Buyers must gather all the required documents for the new mortgage, get approved for a new home loan and prove their condo is worth enough to refinance. The big difference? Fannie Mae and Freddie Mac must approve the condo building in order for you to qualify for a conventional mortgage.

Sandra Shaud, a 30-year veteran of the mortgage industry, says Fannie Mae and Freddie Mac will not finance or refinance mortgages in condo units that have certain characteristics. For that reason, Shaud explains to her customers that refinancing a condo is a three-part process: The borrower needs to get approved, the property must appraise for a certain amount and the condo itself needs to be approved.

“We aren’t in the clear until all three of these facets of the loan have been fully approved,” she says. On a single-family home or building with 2-4 separate units, it’s only the borrower who needs to be approved.

What makes a condo ineligible for a new home loan?

Fannie Mae has a long list of no-nos, including:

  • Projects that are owned and operated as a hotel or motel
  • Investment securities
  • Projects that include split-ownership arrangements
  • Projects with mandatory membership fees for amenities owned by a third party such as golf courses or country clubs.
  • Units that allow owners to divide their unit into multiple smaller units
  • Units that are not actually real estate (e.g. houseboats, cabanas, etc.)
  • Properties with additional business arrangements, such as a spa or health club
  • Properties where the homeowners association is named as a party to pending litigation
  • Projects with a lien for unpaid expenses
  • Projects with more than 25% of commercial space
  • Projects with non-conforming land use
  • Rehab projects that weren’t pre-approved by Fannie Mae
  • New projects for attached units in Florida
  • Manufactured homes that weren’t pre-approved by Fannie Mae

What does my condo need before I refinance?

In addition to making sure your condo doesn’t have any ineligible characteristics, you also need to make sure your condo meets the following additional requirements:

  • The condo must meet applicable insurance guidelines per Fannie/Freddie rules
  • Your condo unit must be covered by title insurance
  • Unit owners who want to refinance must have undivided ownership or interest on the land where the project is located
  • Unit owners must have sole rights to and ownership of common areas in their condo unit
  • Note the limits on the number of condominium units that can be rented out; a maximum of 90% of condos must be a primary residence and not investment property. (In Florida, only 75% must be primary residences).

If your condo is deemed ineligible, Shaud says it’s likely you will have to stick with the loan you have.

There’s an extra step when refinancing a Federal Housing Administration loan: The FHA lists eligible and ineligible properties on its website. If your condo unit is pre-approved by the FHA, then you can apply for an FHA home loan or refinance through the FHA; if your building isn’t approved, you cannot qualify for an FHA loan.

While these requirements may seem like a pain, Shaud says they are set up to protect your best interests. “Condos are more complex because you’re financially intertwined with all the people living in your building,” she says. “The lenders have to set higher standards to protect their financial interests and yours.”

Preparing for refinancing

If you’re worried you won’t be able to figure out whether your condo meets Fannie and Freddie standards, don’t be — Shaud says it’s the job of your mortgage lender to determine whether your condo is eligible for a traditional home loan, so you can sit back and let them do the work.

In the meantime, there are plenty of steps you should be taking to prepare for your refinance:

Check sale prices for comparable condos in your building or area to determine whether you have enough equity to refinance.

Shaud says that you should do some basic legwork on your own, including figuring out what your condo may be worth. This is important because you typically need to have at least 5% equity in your property to qualify for a refinance — equity is the difference between what your home is worth and the amount you still owe on the mortgage. By checking recent sales prices on comparable condos in your neighborhood, you can figure out whether your property has gained in value, lost value or at least held its ground. While you can do this research yourself online, Shaud says your mortgage lender or a real estate agent could also help you find comparable condos in your area.

Make sure a refinance would leave you better off.

Is this refinance even worth the trouble? Shaud says you need to have a clear reason. Can you qualify for a lower interest rate that would help you save money over the long run? Are you looking for a lower monthly payment? Do you want to trade in your 30-year mortgage for one that will be paid off in 15 years instead? Ask yourself what your benefit is before you take steps to refinance.

“Refinancing doesn’t make sense unless there is some benefit to you, so don’t spend your time on it if you don’t have a clear goal,” says Shaud.

Consider the costs of refinancing

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Most borrowers should also expect some fees, so factor those costs into the equation when deciding whether a refinance is worth the trouble — and expense. Also keep in mind that some government programs such as HARP and FHA may help keep the costs of refinancing down to a minimum if you qualify.

Calculate your new payment.

Once you have a goal, a mortgage calculator can be a valuable tool. You can factor in current interest rates or a different repayment timeline, for example. The numbers are only estimates, but they can give you a good idea of what your new loan might look like.

Check to see if your credit score is in good shape.

Mortgage lenders tend to offer the best interest rates and loan terms to individuals with “very good” or “excellent” credit — or FICO scores over 740, according to myFICO.com. LendingTree offers a free estimate of your credit score where you can see where you stand.

Take steps to improve your credit score.

If your credit score needs work, it may be worth your time to improve your credit before you apply for a condo refinance. Steps you can take to improve your credit fairly quickly include paying your bills on time, paying down debt to decrease your credit utilization and refraining from opening new cards or closing old ones.

Gather the required documents you’ll need to refinance.

By having your paperwork handy, you can ensure a much faster experience once you take the steps to actually apply for a condo refinance with a lender.

Ashley Taylor, a mortgage consultant with First World Mortgage, advises clients to gather one month of pay stubs, two years of W-2s and federal tax returns, two months of bank statements, a copy of your homeowner’s insurance policy, and a recent mortgage statement. In addition, list all outstanding debts including car loans, personal loans, and student loan debt.

Getting offers on your condo refinance

Once you have determined that you have enough equity in your property to refinance, your credit is in good or great shape and that your condo meets the standards for a refinance set by Fannie Mae and Freddie Mac, look for a trusted lender. Taylor advises borrowers to expand their reach beyond lenders who offer conventional condo loans.

Be sure to compare each loan and its terms, including the interest rate and any applicable fees, including origination fees. “Make sure you’re making an apples-to-apples comparison of each lender, and read reviews,” Taylor says. Several websites allow users to submit their information once and receive multiple offers; this includes LendingTree, where you may read consumer reviews from the comfort of your couch.

Do you qualify for a program that helps homeowners refinance?

Several government programs exist to help certain homebuyers navigate the process. Options include:

  • Home Affordable Refinance ProgramHARP was created to help consumers who owe more than their home is worth. Criteria for these loans may be less strict than a conventional mortgage and closing costs are lower than many other loans.
  • FHA Streamline Refinance – If you bought your condo with a FHA loan in the first place, a FHA Streamline Refinance can help you into a new home loan with limited underwriting and more relaxed credit requirements.
  • VA Interest Rate Reduction Refinance Loan – Military veterans may qualify, with no appraisal or underwriting required.
  • USDA Streamlined Refinancing – If you have a USDA loan on your condo already, you may qualify for a low-cost refinance with no appraisal, no credit review and no home inspection.
 

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