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How Condo Mortgages Work: All You Need To Know

Condominium-living is now becoming a popular choice for families in the US and also around the globe. Here's all you need to know about condo mortgage.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Our opinions are our own.

Table Of Content

Condominium-living is now becoming a popular choice for families around the globe. It is especially suitable for people who want to buy an affordable home but do not want to bother themselves so much with maintenance, repairs, security, and landscaping.

Whether you’re buying a condominium as an investment or as your foray into homeownership, it’s always a long-term commitment particularly when you acquire it through financing.

You can choose to repay it between 15 and 30 years. Pick a longer-term if you want to keep your monthly payments low and a shorter term if you want to save interest over time. Make sure that you check the types of 30-year loans and the condo qualifications before signing up for a specific loan program.

And if you’re eyeing that newly-built condo down the end of the street, you should familiarize yourself with a few essential steps in getting a mortgage so you can acquire the condominium.

What Exactly Is A Condo?

Condominiums are buildings that are partitioned into and comprised of individually owned units. Although they are similar in nature to apartment buildings, each residence within them is owned by a specific owner rather than a landlord or property management firm. Condo owners, in effect, own only the portion of the structure in which they exist – specifically, the interior of their residence, as the exterior and shared areas of the building are generally owned and run by a condo or homeowners association (HOA).

Condos are a popular choice for first-time home buyers because they are typically smaller, less expensive, and less demanding or time-consuming to preserve than single-family homes. As previously stated, purchasing a condo entails joining the building's homeowners association and agreeing to follow its rules.

According to a 2020 report by the National Association of Realtors, first-time home buyers comprised 31% of all US homebuyers in 2020, which is a 2% drop from the previous year’s share of first time owners. The period between 2003 and 2005 recorded a uniform 40% share of first-time home buyers. Since 2011, the share of first-time home buyers has not risen beyond 40%.Chart: Share of First-Time Home Buyers Among all Home Buyers in the U.S.

Is Buying a Condo Easier Than a House?

Many people enjoy the convenience of a condo, but buying a condo can be a little more complicated than buying a house. Since the development is made up of multiple units, your mortgage lender will need to verify the unit, building and condo association is not high risk.

Purely as a buyer, condos can be more attractive compared to a house. While they tend to be smaller in square footage, the maintenance is often far cheaper, since you will only be responsible for your home interior. However, you will need to pay condo association dues and the more amenities your complex has, the higher the fees you can expect to pay.

Condo Vs Traditional Mortgages

Say hello to the elaborate dimension of condo loan rules. If the condo loan rules of FHA loans and conventional loans aren’t diverse enough, each lender’s investor may also have their own set of unique rules (they call overlays). Condo loans are totally different from single-family home loans and not all condominium units can qualify for a loan.

First of all, condo unit mortgages are more expensive than their single-family homes counterpart. The reason for this is that condominium values face additional risks and many of them are beyond the borrower’s control.

When you buy a condo, you’re not just paying for the unit itself because its value also depends on the owner’s access to communal resources such as snow removal, lawn maintenance services, tennis courts or a big swimming pool.

Your association will also maintain the exterior of your home (for example, the roof). However, when the association runs low on funds and does not have enough money from dues or other assessments, they won’t be able to cover maintenance and other resources. This might negatively impact the value of your property.

But since the lender is basing the loan value on the property value, it is very important for them. After all, in case the borrower defaults, the lender would want to recover their money by selling the condo unit at a sufficient price.

Historical data maintained by the United States Census Bureau shows a sharp decline in conventional mortgage for new homes from 2005 to 2010. Within the 5-years, new home sales moved from 1,151,000 to 189,000. You can associate this decline with the economic crisis of 2008-2009. However, since 2010, the conventional mortgage has been rising to reach 561,000 in 2020. Despite covid-19 economic havoc, house sales demand did not dip, compared to the period between 2005-2010.  

Chart: Conventional Mortgage Number of New Home Sales in the U.S. 2000-2020 (in thousands)

How to Get a Condo Loan?

If you’re looking to get a condo loan, you will have access to the same mortgage options as those buying a single family home. However, each loan program has its own rules for condo loans. For example, for FHA loans, your condo needs to be listed on the approved condominium list. There is a similar VA list.

You can then get pre approval for your loan. This is a good way to ensure your chosen condo meets the program requirements. If successful, you can then proceed to applying for your home loan. The lender will review your application details and your lender will also have a list of questions for your condo association. Once approved, you can proceed with the purchase.

Before applying for a condo loan, prospective condo owners should request a broad analysis of building rules (and finances) from homeowners associations and seller's agents. This could include requesting to see important clauses and covenants, pet regulations, data on annual dues and planned expenses, and other stuff. It's important to note that some condo associations may also want to conduct an introductory interview with you as well.

Condo Mortgage Has Higher Eligibility Standards

To mitigate the risks that come with lending for condo purchases, Fannie Mae and Freddie Mac have established higher eligibility standards on conventional condo loans.

Compared to a regular housing loan, the down payment and interest rate on a condo mortgage are higher.

  • The down payment is 25% instead of 20% for a single-family house.
  • The interest rates are 0.5% to 0.75% higher than for a single-family house.

Another thing is that the lenders also look at other items to determine the financial viability of the condo such as the association’s reserves and budget.

They would often review the official association documents or ask you to answer a questionnaire. The lenders would look at some specific factors that would disqualify a complex to get financing. Some of them are pending litigation against the association. If over 50% of the units are rentals, a delinquency rate on condo dues of over 15%, and if more than 20% of all the units belong to just one owner. And of course, the condo must pass an appraisal to determine its value and that the conditions are suitable for financing.

Warrantable Vs Non-Warrantable

You will find that some condos can still get financing but only with non-warrantable financing. This means that while a lender will be willing to lend funds to buy the condo, it may not meet the elemental requirements of popular mortgage investors like Freddie Mac, Fannie Mae, the FHA or the VA.

If you get a non-warrantable condo, you may find that you won’t be eligible to get a mortgage or if you can get one, it will be with less favorable terms.

This is because lenders would often sell their loans to mortgage investors to raise capital to be able to lend more without having to wait for the loan to mature in 30 years. If selling the loan under normal terms is something that currently is not marketable, they may have to suspend lending to you. At the moment, Quicken Loans does not offer non-warrantable financing.

Why Are Mortgage Rates Higher on Condos?

Condo loans are more expensive because the lenders would rely not just on the borrower’s financials – they will have to look at other factors.

For example, if the condo association as a whole is struggling financially, the value of each condo unit can diminish as the individual owners are defaulting and neglecting their condo fees. Fannie and Freddie have set specific guidelines for condo projects that measure up for conventional mortgages.

Normally, lenders will not finance the acquisition of condo units if they perceive that the project, taken as a whole, is very risky. When there’s a high vacancy rate and just a few owners are living in the complex, each unit pays a higher share of the association dues. This already increases the risk of default and therefore might jeopardize the entire project.

Lenders will make sure that the financial structure is sound and that the history of the condo association is spotless so that there’s a lesser chance of trouble happening soon.

You won’t see lenders imposing these rigid requirements for newly-constructed or newly-renovated projects, however.

FHA Condo Loans

First-time buyers would often look to the Federal Housing Administration (FHA) to back up the loans because the credit requirements are more lenient and the down payments can be as low as 3.5% of the purchase price.

To avail of an FHA loan to buy a condo, the condo you want to purchase must have the approval of the FHA. Unfortunately, their approval process includes a range of items that the buyer has no control of. Some of the current requirements are:

  • The unit owners must occupy at least 50% of the units.
  • Those units that are more than 30 days behind in the payment of the association dues should not be more than 15% of all the units.
  • The completion date of the project must be for at least a year and there will be no additions or pending phases of construction.
  • Only a maximum of 30% of the units can have FHA loans.
  • As required by the HUD, the condo should appear in the FHA-approved condominiums list.

You can find a list of FHA-approved condos here, but remember that they change the approval criteria constantly. So, be sure to work with your Realtor to research any condo you want to buy using an FHA financing.

According to data maintained by the US Census Bureau, between 2004 and 2020, 2020 was the year with the highest FHA-insured houses. Notably, a lot more people faced financial challenges due to the covid-19 economic crisis. It is similar to the events between 2007 and 2010. However, 2007 was the year with the least FHA sold homes, with only 28 financed by FHA mortgage.

Chart: FHA Insured Number of New Home Sales in the U.S. 2000-2020 (in thousands)

Don’t Forget The Varied Fees

When you are deciding if you should buy a condo, don’t forget the condo fees.

You might say that condominiums should be less expensive than single-family homes and you are perfectly correct. But the big difference with individual units are the higher homeowner association costs that come with them. These fees vary from complex to complex but condo associations can also assess other quarterly or yearly fees aside from the monthly fees. They are mandatory so there’s no escaping them such that your lender includes these fees into your out-of-pocket estimates and your debt-to-income ratio.

So, when comparing condos, take into account the homeowners association (HOA) obligations and what services and amenities you would be paying for. Check if there are separate charges for other features such as parking, pool passes, gym privileges, security, etc.

You should factor these expenses into your monthly budget estimate and let your lender know exactly each specific expense to arrive at an accurate monthly expense budget. And don’t forget that while your home insurance payment can cover your mortgage, it does not include your HOA obligations.

How Do I Sell My Condo?

The average time it takes to sell a condominium is affected by supply, demand, and price. According to SFgate, condominiums spend 200 to 250 unsold days on the market in the Chicago market, which has 90,000 units. Certain Chicagoland condominiums, on the other hand, have sat unsold for more than 2,000 days. Condominiums under $450,000 in California's high-demand Los Angeles County spend about 84 days on the market, while condos over $450,000 spend about 100 days on the market.

When it comes to selling a condo, condominium community homeowners associations (HOAs) can be beneficial or detrimental. When it comes to homeowner members marketing their properties for sale, certain HOAs have very strict rules, including not allowing “for sale” yard signs. In addition, prospective condominium purchasers may be required to apply to the condo community's HOA for permission to purchase a unit. Nonetheless, informing your condo community and its HOA about your condo sale may help generate sales leads. 

Is Buying a Condo Worth It?

Like single family homes, a condo can be a great investment. You will not only stop paying rent and start paying off a mortgage, but your condo may increase in value. Additionally, you don’t need to worry about property maintenance, as your association dues will cover any repairs or maintenance, you just need to take care of the interior of your unit.

Condos do tend to be smaller than single family homes. You are unlikely to get a lot of outside space, but if this is not a priority for you, you may find a condo a good option.

 

FAQs

Generally speaking, it is harder to get a mortgage for a condo. Since a condo is part of a multi unit development, lenders tend to view these types of homes as a riskier proposition. As a multi unit property, your unit and finances will be intertwined with the other people in the development. So, your chosen condo will be carefully assessed to ensure that you qualify for a mortgage.

It is a good idea to take a little time to research the condo association and check that there isn’t a high number of units delinquent on association dues, most of the units are owner occupied and the association has appropriate insurance coverage.

These factors will help the condo to be classified as “warrantable”, which can help you obtain financing.

Whether you can rent out your condo will depend on your condo association and the terms of your mortgage. Some condo associations insist that units are owner occupied, while others are more flexible. Additionally, many lenders have no problem with mortgage holders renting out the property, providing they are aware of the occupancy change.

So, if you are considering the possibility of renting out your condo, be sure to check the fine print of your condo association agreement and mortgage documents.

While there are loans available with a smaller down payment, if you can put 25% down on your condo, you are likely to access the best rates and deals. Additionally, some types of condo loans require a minimum of 25%, such as Fannie Mae loans.

As with a single family home, putting a larger down payment down on your condo will highlight your commitment to the lender. A larger down payment means that you have a larger stake in the purchase, so you will be able to access better loan deals.