Condo owners can refinance loans and access equity
Refinancing a condo loan or tapping into its equity
- Lenders will look at the financial status of your condo’s HOA.
- The HOA should be certified by Fannie Mae, Freddie Mac, the VA or FHA.
- Your HOA must complete a questionnaire and an appraisal may be ordered.
- Home equity lending usually works the same for condos and single-family homes.
If you own a condominium and you’re looking to either reduce your monthly mortgage payments or tap into the equity you’ve built, you may wonder: Do the rules for home equity loans or refinancing single-family homes also apply to condos? With a few exceptions, the rules for both are the same, regardless of the type of property you own.
How to refinance a condo loan
If you’ve purchased a condo, you’re already familiar with the more cumbersome process of mortgage approval. Lenders don’t look solely at your personal finances — they also look at the financial stability of your condo’s homeowners association, or HOA.
If your condo is certified for Fannie Mae, Freddie Mac, U.S. Department of Veterans Affairs (VA) or Federal Housing Administration (FHA) loans, refinancing is more straightforward. These entities will have scrutinized the HOA to determine how many units are owner occupied, how many foreclosures have occurred and how many owners are up to date on their dues, among other things. FHA-approved properties must be recertified every two years, while Fannie Mae and Freddie Mae recertify every 18 months. It’s important to know the current status of your HOA’s certification, as it may have changed since you purchased the property.
If certification is current, your lender will require the HOA to fill out a questionnaire centered around owner-occupation figures, dues, maintenance and insurance, among other items. If the condo association is still considered “new,” often meaning not all the units have been completed, the questionnaire will ask for an expected completion date, property-value estimates and planned occupancy rates.
Along with the questionnaire, the lender may also want an appraisal to determine property value and how much equity exists. The only loans that won’t require an appraisal are through the FHA’s streamline program and the VA's Interest Rate Reduction Refinance Loan (IRRRL) program. An appraisal will look at recent sales of comparable properties in the same complex or around the neighborhood.
If the HOA’s certification has lapsed, it’ll need to be renewed before a new FHA loan is allowed, since the agency no longer allows so-called “spot approvals” of individuals units. Fannie Mae has a streamlined review process for previously established condo projects that is less intensive than a new-project review. Additionally, Fannie Mae will waive the review for certain cash-out refinance applications if it owns the original loan.
How to tap condo equity
Obtaining a home equity loan or home equity line of credit (HELOC) for a condo may be a less arduous process than refinancing. Equity lenders generally treat condos the same as single-family homes, so as long as an appraisal determines your condo has equity, you should be able to tap into it.
Home equity loans, or second mortgages, allow the owner to receive a lump-sum payment, often between 70 percent and 85 percent of available equity. For example, if your home is valued at $200,000 and your mortgage balance is $100,000, your total equity is $100,000. A lender that allows a maximum loan-to-value (LTV) ratio of 80 percent will approve a home equity loan of up to $60,000 ($160,000 of debt divided by $200,000 of value equals 80 percent). You’ll repay the loan with fixed monthly payments over a fixed term, just like your first mortgage.
HELOCs work more like credit cards. A lender will determine how much you can borrow and you can access it as you please, paying interest only on the amount you withdraw. Some lenders may offer a 20-year HELOC with a five-year draw period and a 15-year repayment period. You’ll have five years to make withdrawals before the credit line freezes and you must repay principal and interest. Other lenders may grant longer draw and repayment periods, with the option of switching from an adjustable interest rate to a fixed rate.