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How to Get a Mortgage on a Condo
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How to Get a Mortgage on a Condo

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
Buying or refinancing a condo is more challenging than buying or refinancing a house because it can be more difficult to get a mortgage on a condo. Mortgage lenders have different requirements for condos than they do for single family properties such as houses. Although borrower qualification requirements such as your monthly income and debt, down payment, credit score and employment history are relatively the same regardless property type, lenders require much more information about the specific property and development when you get a mortgage secured a condo.

This is because condos are perceived to be a higher risk asset, or collateral for the lender, as compared to a single family home.  The value of a condo depends on many factors including the general condition of the condominium project and the value of other units.  If other owners in the development do not maintain their units or if the project needs maintenance, that affects the value of your condo.  Additionally, if the condo project falls into disrepair and your property value declines that increases the risk for the lender.  Finally, condo owners are required to pay for upkeep plus any special projects so lenders want to make sure that you can afford these potential expenses in addition to your mortgage payment.  For example, the condo development may have a significant deferred maintenance project such as installing a new roof that you are required to pay for.

Another factor that lenders focus on when you apply for a mortgage on a condo is homeowners association (HOA) dues.  Condo owners are obligated to pay HOA fees to cover the cost of property maintenance, shared building services and to pay for insurance that covers the physical structure of the development.  These dues are an extra monthly expense that lenders count as debt when you apply for a mortgage. The higher your debt, the lower the mortgage amount you can afford so HOA dues impact what size mortgage you qualify for.  Most single family homes do not have HOA fees so this is another reason why it is more challenging to get a mortgage on a condo than a home.

Lenders also focus on the ownership and occupancy rate of the condo project because they want to make sure that enough people are paying HOA dues to cover the general expenses for the development. The ownership rate is the percentage of units that are owned and the occupancy rate is the percentage of units that are occupied by the owner.  Condo owners that live in their units are more likely to take care of the unit and maintain its value.  If the property has a low ownership rate, the development may not have sufficient funds from HOA dues to pay for upkeep or insurance which could negatively impact the value of condos in the project.  Additionally, a low occupancy rate could also result in lower property values. 

Finally, condo projects also tend to have a higher rate of litigation so lenders want to understand if the development is a part of any ongoing lawsuits.  For example, condo owners could sue the project builder to fix a construction error or other issue.   

As you can see, there are a lot of inputs that go into getting approved for a mortgage on a condo.  In addition to evaluating the individual applicant, lenders carefully assess the condo project and the specific property you are financing.  In short, both the borrower and the condo development must meet specific lender qualification guidelines, which are stricter than getting a mortgage on a single family home.  Because getting a mortgage on a condo can be tricky, we outline the key points a borrower should focus on to make a potentially challenging process go as smoothly as possible.
1

Make Sure the Condo Development is Warrantable and Approved

Fannie Mae, the FHA and the VA determine guidelines that condo projects, or planned unit developments (PUDs), are required to meet to be eligible for conventional, FHA and VA mortgages.  Condominiums that meet these requirements are classified as warrantable which means you can finance the purchase of a condo or refinance the mortgage on a condo in the project with a standard mortgage program through a traditional lender such as a bank, mortgage broker or credit union.  If a condominium does not meet the guidelines it is classified as non-warrantable. Fewer lenders offer mortgages for non-warrantable condos and you typically pay a higher interest rate and closing costs so buying a warrantable condo is usually much easier and less expensive.

Certain types of housing are not eligible to be warrantable including country clubs, time shares and other fractional ownership developments, continuing care facilities, condotels and some live-work projects.  Additionally, condo projects that permit short-term rentals are also not warrantable so it can be more challenging and costly to get a mortgage on a condo in a building that allows airbnb rentals.  Finally, construction on the condo project is required to be completed for the units to be warrantable. You can put a deposit down on a condo before the project is finished but you cannot close your mortgage and finalize the purchase until construction is completed.  On a related note, to qualify for an FHA mortgage on a condo in a new development, the majority units in the building are required to be sold so you may not be able to use the FHA program to if you want to buy one of the first available units. 

Fannie Mae (for conventional loans), the FHA and the VA publish a list of approved condo projects based on the guidelines outlined above as well as other criteria. Condo developments included on these lists are warrantable, which makes it easier for you to qualify for a mortgage.  If your condo project is not on the lists you can apply to have the project added which involves the homeowners association (HOA) or project developer submitting an application and supporting documentation.  If the project does not meet the criteria to be approved you are required to obtain a non-warrantable condo mortgage.

 Below we provide links to the approved condo search websites for conventional mortgages (Fannie Mae) and for the FHA and VA programs.  The list of approved developments changes frequently based on new information so make sure you are review the updated lists to determine if your project is warrantable.  This helps ensure that the condo you want to buy or refinance is part of an approved condo project.

Fannie Mae Approved Condo Search

HUD/FHA Approved Condo Search 

VA Approved Condo Search

2

Understand Lender Condo Requirements

In addition to meeting the eligibility requirements for project type outlined above, lenders also apply development-specific guidelines that must be met for condos to be warrantable.  Condo development requirements focus on the property ownership and occupancy rates, HOA dues and reserves, property insurance and litigation the property is involved in.  We list the lender condo development requirements below:

A development must have a minimum of 51% owner occupied units (so investment properties cannot comprise the majority of the development)

For projects with five to twenty units, no more than two the units may be owned by a single investor.  For projects with twenty-one or more units, a single investors can own no more than 20% of the units

The HOA fee delinquency rate must be less than 15% (so at least 85% of property owners in the development must be current on their HOA fees)

The master insurance policy, the policy that covers the entire condo development rather than the contents of a specific unit, must meet lender standards (borrowers are also required to obtain a separate insurance policy that covers the contents of their unit)

The lender reviews the HOA budget to ensure that there are sufficient funds in reserve to pay for ongoing maintenance, repairs and replacements for the development.  If the HOA has insufficient reserves to pay for deferred maintenance or other major expenses, the condo project may be deemed non-warrantable

The lender reviews any litigation involving the condo development or the HOA.  Significant pending litigation may make it challenging to qualify for a mortgage on a condo

Non-residential or commercial space cannot exceed 35% of the total development space

All of these lender condo development requirements are addressed in a document called the HOA Questionnaire. The lender requires a completed HOA Questionnaire as part of the borrower’s mortgage application. The HOA Questionnaire is completed by the condo development’s HOA, management company or some developments work with a third party service that collects this information and provides the completed HOA Questionnaire to the lender for a fee.  In an ideal scenario, the HOA keeps an updated questionnaire on file and you can review a copy before you submit an offer on a condo in the building to make sure there are no significant issues that would prevent the condo from being warrantable.

Borrowers should also be focused on these requirements to make sure that the condo development they are buying into has the resources, insurance and ownership profile to protect their property value. Please note that for new or under-construction condo developments, the lenders designated by the developer to provide financing to prospective buyers manage the property requirement and approval process.

3

Get Pre-Approved

Whether you are thinking about getting a mortgage on a condo or a home, we always recommend that you get pre-approved for your mortgage at the beginning of the process.  Getting pre-approved for a mortgage on a condo is even more important because lenders have specific requirements for condos and you want to make sure that the condo you are buying or refinancing meets the lender’s guidelines.

In some cases a lender may pre-approve a borrower for a certain mortgage amount but the pre-approval may not be tied to a specific property.  If you are getting pre-approved for a mortgage on a condo, make sure the lender has all the necessary information on the property so the pre-approval letter covers both the borrower and the condo.  If you are buying a condo and considering multiple options, get pre-approved for several properties so that you can move quickly when you decide which condo you want to buy.  Getting pre-approved for a mortgage on a specific condo before you submit your offer to purchase gives you an advantage over other buyers and helps you avoid financing challenges if the property is non-warrantable.

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4

Understand How Condo HOA Fees Affect What Size Mortgage You Can Afford

Most condominium developments charge property owners monthly homeowners association (HOA) fees for the maintenance and upkeep of the project.  HOA fees vary depending on many factors including the size and age of the development and value of the properties. HOA fees can run from less than $100 per month to over $1,000 per month.

You typically are not required to pay HOA fees when you buy a home so this an additional monthly housing expense condo owners should be aware of.  HOA dues are included in your debt-to-income ratio when you apply for mortgage which reduces what size loan you can afford.  This means that most borrowers qualify for a smaller mortgage on a condo than they would for a loan on a single family home.  If the condo is non-warrantable your mortgage amount is even lower because your interest rate is higher.

Use our Mortgage Qualification Calculator to determine what size loan you can afford based on your income, debt and HOA fees

It is also important to understand the specific services your HOA dues pay for so you know what your money is being spent on each month. Most HOA fees cover property maintenance and general insurance but some dues may also include property tax. Condo owners should always know what costs are covered by the fees and what expenses they are required to pay on their own.

You should also make sure that HOA has enough money to pay for any significant projects. The last thing you want is to buy a condo and then be required to contribute personal funds toward a major repair project for the development because the HOA budget is underfunded.

5

Homeowners Insurance Policy for a Condo

The condo development or HOA pays for a master insurance policy that covers the physical structure of the development but the individual condo owner is responsible for buying homeowner’s insurance to cover the contents of their unit (this is typically called an HO-6 insurance policy).  For example, in the unfortunate case where a condo development is destroyed by fire, the cost of rebuilding the physical structure is covered the master insurance policy but the cost of replacing the contents of an individual unit, such as personal belongings and appliances, is covered by the condo owner’s homeowner’s insurance policy.  Keep in mind the cost of an H0-6 insurance policy when you buy or refinance a condo.

6

How to Get a Mortgage on a Non-Warrantable Condo

Just because a condo is non-warrantable does not mean you cannot qualify for a mortgage to buy or refinance it but it does require extra effort.  In short, because they involve greater risk, a relatively small number of lenders provide mortgages for non-warrantable condos.  Borrowers may need to search around to find lenders that offer the program.  Mortgage brokers and private money, or hard money, lenders are likely your best option and you can use the FREEandCLEAR Lender Directory to search by lender type.  Non-warrantable condo loans are more expensive and there tends to be a wider range in interest rates and closing costs so borrowers should shop multiple lenders to find the best mortgage terms.  

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Sources

Condo Mortgage Guidelines: https://www.fanniemae.com/singlefamily/project-eligibility

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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