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:
- Evaluates whether you have the means and credit to repay the loan and
- 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.
- Work out your budget to know how much house you can afford.
- Get mortgage pre-approval (you can start this online now).
- Find a buyer’s agent experienced with condos and locate units you like, paying attention to their FHA/VA status if it’s a requirement.
- Finally, before or in conjunction with making an offer on a condo—ask to see the condo documents and ask the sellers the same questions the banks will ask about the association finances and owner-occupied units. In many cases, you’ll be able to spot red flags right away.
Your thoughts: Have you gotten a mortgage for a condo recently? How’d it go?