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.
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.
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.
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.