Strict guidelines make condo loans more difficult to get

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Ask a Lender
June 5, 2017 | Updated September 21, 2017


Key Points

Mortgage loans for condos

  • Lenders scrutinize the HOA to make sure its finances are in order.
  • Most lenders want a high percentage of condo units to be owner occupied, not rentals.
  • Condo purchase prices are generally less expensive than single-family homes.
  • Condo down payment percentages and interest rates are often higher, however.

Although they aren’t as popular as traditional homes, condominiums are still in high demand in many areas of the country. More than 600,000 condos were purchased nationwide in 2016, according to the National Association of Realtors.

Condos combine the benefits of homeownership with the convenience of property management. A condo might be an attractive option, whether you’re buying your first home, upgrading or downsizing. But before comparing lenders and filling out a mortgage application, you should understand the key characteristics of condos, as well as how they compare with single-family homes and townhomes.

What is a condo?

Condo properties typically resemble apartment complexes, rather than single-family developments, though they can include either attached or detached housing units. The key difference between condos and apartments, of course, is that a condo resident owns their home instead of leasing it.

Condos and townhomes share many of the same features. But the main difference is that ownership of a condo involves only the interior of the unit. The building’s exterior, surrounding property and any communal areas are maintained by a homeowners association, or HOA. With a townhome, the homeowner controls the interior and exterior of the building, as well as surrounding property, such as a lawn or garden, though there are often communal areas that remain under HOA control. Single-family homes often function in similar fashion.

A prospective homebuyer might choose a condo over a townhome or a single-family home for several reasons. First, condos require fewer maintenance responsibilities and HOA fees typically cover all exterior upkeep, including painting, pest control and lawn care. Second, homeowners insurance for a condo typically costs less compared to a townhome or single-family home, since the owner is liable only for the home’s interior. Third, condos may offer amenities that single-family homes don’t, such as a pool, hot tub, golf course or an exercise facility. Lastly, condos are often less expensive than single-family homes — on average, about $12,000 less nationwide in 2016, the National Association of Realtors said.

How to get a condo loan

Be forewarned: Obtaining a mortgage loan for a condo is much different — and often, much more difficult — than financing a single-family or townhome purchase. This is because lenders must consider the financial stability of the condo association. Also, the requirements tend to vary a quite a bit from lender to lender. Here are the guidelines for some commonly used loan programs:

Federal Housing Administration (FHA)

To get FHA financing, a condo must be on a list of approved properties. To make the FHA-approved list, a condo association must meet certain stipulations. Typically, more than 50 percent of the condos must be owner occupied, not investment rentals, though the FHA recently lowered the number to 35 percent on some existing developments. Of the units financed with FHA loans, 80 percent must be owner occupied. The property must be at least a year old and have no pending construction. 

The FHA requires the condo association to have at least four “dwelling units,” and may have other detached or semidetached buildings. Like other FHA loan types, the minimum downpayment is 3.5 percent, and many of the closing costs may be rolled into the loan.

Fannie Mae and Freddie Mac

Fannie Mae. one of the two major agencies that purchase loans on the secondary market, has a list of eligible projects through its Property Eligibility Review Service (PERS), but many condos are also eligible through a limited-review process. A prospective buyer must make a 10 percent downpayment on a primary residence or a 25 percent downpayment on a second home, and an HOA official or property manager must complete a lender questionnaire to qualify for a limited review.

Like FHA condo loans, Fannie Mae requires owner occupation of more than half of the units. If the property is at least a year old, all planned amenities must be completed. For properties with more than 20 units, a single investor can own no more than 10 percent of the units.

Freddie Mac is the other agency that purchases what are called conforming mortgage loans, Freddie also issues condo loans. It has similar requirements to Fannie Mae and the two agencies have standardized their questionnaires to provide additional clarity for lenders and borrowers.

U.S. Department of Veterans Affairs (VA)

The VA also supplies its own list of loan-eligible condo properties. If you find an eligible property, securing a loan is fairly straightforward since VA guidelines are the same for condos and single-family homes. That means you can get a condo loan with no downpayment or private mortgage insurance. Condo associations that aren’t VA-approved can apply for the designation by supplying a written request, organizational documents and state certification, among other items.

Mortgage roadblocks

If the property you’re looking to purchase isn’t approved by any of the aforementioned programs, it’s still possible to get a condo loan. But lenders may impose a downpayment requirement of 50 percent or more, as well as higher interest rates. Regardless of the loan program you’re using, there are a number of factors that can cause your application to be denied.

Lenders will scrutinize an HOA’s finances. If members aren’t paying their dues, that is a red flag. Generally, lenders will not approve new loans involving an HOA with a delinquency rate of more than 15 percent. They’ll look for budgets that include a reserve contingency, often 10 percent or more. Condo associations with pending lawsuits or inadequate insurance are also lending deterrents.

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