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Condo Financing is Different

Are you considering getting a mortgage to buy a condo? Read this first.

As a Realtor, I know that condos are popular among first-time home buyers. After all, the average condo costs less than the average single-family home. (In March 2011, the average sale price of a condo in the U.S. was $153,000 compared to $160,500 for an existing single family home, according to the National Association of Realtors).

Condos require less maintenance and many complexes offer amenities like gyms and pools, all of which are attractive to young, active owners.

But condos aren’t perfect.

There are homeowner’s association rules and monthly fees to cover association management and upkeep of common areas. And then there’s the fact that condos can be more difficult to buy (at least with a mortgage) than single-family homes. And that’s especially true if you want to use an FHA loan to buy a condo.

Condos Require Special Underwriting

When you walk into a bank and apply for a mortgage, the bank begins the underwriting process, in which it:

  1. Evaluates whether you have the means and credit to repay the loan and
  2. Assesses the property you’re buying.

The bank wants to know that if you default on your mortgage, it can sell your property and recoup most of its money.

When you’re buying a single-family home, the underwriting process is straightforward. The bank appraises the home to ensure it’s worth what you’re paying for it and that there is a clean title (so somebody else can’t claim they own it).

When you buy a condo, however, the bank considers additional factors such as:

  • The finances of your homeowner’s association (reserves and arrearages). If other condo units are in foreclosure—or the owners simply stop paying their condo fees—it’s not good.
  • The condo documents. Condo associations are governed by a legal agreement. All are slightly different. None are perfect. The bank will be on the lookout for any red flags in the condo docs that could create a situation that would cause the property to depreciate.
  • The percentage of owner-occupied units. The bank may also consider the number of rented units and vacant units as barometers for the property’s potential to holds its value.

These factors began playing a larger role in the underwriting process following at the onset of the housing crash in 2008.

As a result, it’s simply more difficult to get a loan to buy a condo.

Assuming you can’t pay cash, it’s easiest to finance a condo with a conventional mortgage rather than an FHA or VA home loan, which we’ll discuss below. A “conventional” mortgage meets specific underwriting requirements. For example, a conventional mortgage requires a loan-to-value (LTV) ratio of 80% or less. In other words, you must put 20% or more down.

You’ll be subject to the additional underwriting requirements noted above, but not to additional restrictions placed on FHA and VA loans used for condos.

FHA CONDO LOANS

First-time buyers often look to loans backed by the Federal Housing Administration (FHA) because they have relaxed credit requirements and require down payments as low as 3.5% of the purchase price.

In order to secure an FHA loan to purchase a condo, however, the condo you are purchase must be FHA-approved. Unfortunately, that approval process includes a variety of factors that you, as a buyer, cannot control. Some of the current requirements include:

  • At least 50% of the condo units must be owner-occupied.
  • No more than 15% of the units in the complex can have association dues that are more than 30 days behind.
  • No more than 30% of the units in the complex secure existing FHA loans.

In the past, the FHA would insure loans on condo unit without the whole complex having to be approved. These so-called “spot approvals”, however, are long gone, meaning FHA condo buyers have far fewer options.

There is a list of FHA-approved condos here, but keep in mind that approval criteria change constantly, however, so be sure to work with your Realtor to research any condo you want to buy with FHA financing.

VA CONDO LOANS

VA loans provide financing to qualified veterans with little money down. Similar to FHA approved condos, the entire complex has to be approved by the Department of Veterans Affairs in order for a buyer to purchase a condo unit with a VA Loan. You can find out if a condo is VA-approved here.

Where to Start

If you have your eye on buying a condo and are hoping to get a mortgage—even an FHA or VA loan—don’t despair, it’s still possible, it simply takes a little more homework to avoid last-minute disappointment that a bank won’t approve the condo you want to buy.

Your thoughts: Have you gotten a mortgage for a condo recently? How’d it go?

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. oh yes, the condo reserves. It’s funny how when I was looking at buying my condo they said they had plenty of reserves, which they did. My concern was I didn’t want them raising my HOA dues the minute after I bought since they were already high. Surprise surprise they decided to re-do the roof which drained the reserves, and my HOA dues went up almost $200 per month more after I bough. I asked about the roof before I bough, and they said they wouldn’t be putting on a new one soon. LIARS! :)

    The roof is huge expenses and take a major chunk out of the reserves (if they decide to put a new one on), be sure to ask, and ask lots of tenants and the management company, about it. It’s not like you don’t want them putting a new roof on if it’s needed, but it would just have been good to know.

  2. I think that condos are a way better investment then a house in this current economy

  3. I bought a condo with an FHA loan about a year and a half ago. I needed to go FHA because I was planning to get a fixer upper and wanted cash for the remodle, so I needed a low down payment option, or a perfect place… When I went hunting, I told my realtor is was FHA or nadda, so before they took me around, she verified with the association to make sure they qualified.

    One complex I was really interested in LOST their FHA status after I placed an offer or so, but this was in the middle of banks trying to figure out how to short sale homes, so it wasn’t that big of a bummer because it was only one place and I must have placed 26 offers to find my current home cause the market was that messy.

    But for me, it ment doing my research early and before we started going to places… I didn’t want to walk into a place unless I could get it for FHA… even if I didn’t go with an FHA loan. I wanted a place that had 51% of people as owners ( They generally take better care of their propertys then renters) and I wanted to make sure the Association wasn’t in the red because of people who didn’t pay their dues… Because quite frankly, no one wants to be hit with Special Assessment Fees because their association ran out of cash. (one reason I didn’t buy a unit in the association adjacent to my current home.)

    Thanks for writting this post. Most people don’t google the heck out of what an FHA loan is really all about.

  4. Thanks for sharing your experience South County Girl. You are right about the conditions of the market and needing to place offers on multiple properties. I’m happy to hear that because of your hard work and a good agent, you made it work for you – a success story! :)

  5. Bryan D says:

    Though also with tighter guidelines than in the past, prospective borrwers with less than 20% to put down can also get conventional loans backed by private mortgage insurance. In a lot of cases it can be cheaper than an FHA mortgage.

  6. Although condos definitely have different rules than buying a house, I think the benefits of a condo often make it worth it.

    For example depending on the area, you can generally get a condo for MUCH cheaper than a house. And its still buying property that will most likely go up in value.

    So if you have less money to invest, I think it can pay off to learn the ins and outs of condo investing instead of just focusing on houses.

  7. So important to look into the health of your building and those surrounding it. It will have an impact on the property value of your condo!
    I’m on my second condo. I bought it in 2010. The buying experience was much more difficult than in 2008. Simply put, be prepared to send the same documents to your mortgage provider over and over. And when you think you’re done providing them information, they’ll ask for more. It’s the new reality.. but seriously, they need to get it together if they expect people to buy homes.
    And watch out for condo fees and special assessments. Just like things go wrong in a single family home (SFH), they can in a condo. And all owners will share the misery. Our fees went up (temporarily) about 60% recently. It’s one of the things I write about on my blog to pay off my mortgage by age 30.
    My condo experience has been pretty good. Everyone is different. A SFH isn’t for me. Just pick the right building, in the right neighborhood, at the right price.

  8. I bought a condo 2 years ago. It was a little difficult getting financing, but not too bad.
    They just raised my homeowner dues up to $385/mo. The community i live in is well taken care of, but I hope that isn’t a trend.