First-time buyers, empty nesters looking to downsize, and those who just don’t want the hassle of a house are just some of the buyers powering the growing condo market. However – do condos qualify for financing? – is not a question that many of these would-be buyers ask, and they should.
So, Do Condos Qualify For Financing?: Yes, generally speaking, condos do qualify for financing. However, there are additional criteria, which the condo and the applicants must meet which go above and beyond those of a single-family home. Condos that do qualify for financing are usually subject to higher mortgage rates and higher closing costs.
To help you through the mine-field that is shopping for a condo and securing a mortgage, here is my insider’s guide to condo financing.
Do Condos Qualify For Financing?
As a general rule, yes condos do qualify for financing. However, you are more likely to have a mortgage application for a condo turned down. In addition, if your application is successful, you may have a higher mortgage rate.
Why Is It Harder To Get A Mortgage For A Condo?
The reason it is more difficult to obtain a mortgage for a condo is because of the way condo ownership is structured.
Let me explain.
What You Own When You Buy A Single Family Home
Imagine you are the proud new owner of a single-family house. For the purpose of this example, we will assume it is a home which doesn’t have any strange property quirks such as a public footpath through the garden.
As the owner of the house, the land on which the home sits belongs to you. The structure of the house, the roof tiles, the windows, the wall studs, all belong to you. Any other structures on the property and any improvements to the landscaping such as a deck or a vegetable garden, all belong to you.
You can, within reason, do whatever you like with your entire property.
What You Own Why You Buy A Condo
A condo is not a particular style of building or home; instead, it is a specific form of legal property ownership. When you buy a condo, what you actually purchase is the space from the surface of the floor, walls, and ceilings, inwards. The purchase of a condo unit also comes with a percentage interest in the homeowners association (HOA), which runs the condominium.
A condos HOA manages the common areas of the building(s) as well as setting and enforcing any rules and regulations the residents must follow. These rules and regulations may be very relaxed. On the other hand, an HOA may have an extensive rule book that covers everything down to the color you can paint your front door or the wattage of bulbs allowable in your outside light fixtures.
How Does This Impact Condo Financing?
When you apply for a mortgage, the lender looks at two things:
- Whether or not you have an appropriate credit history and current financial means to repay the loan and afford the ongoing costs of homeownership.
- The property you want to buy. Specifically, whether it is worth the sale price and whether or not the lender would be able to resell the property and recoup their money if you were to default on the mortgage.
When an applicant wants to buy a single-family home, this process is relatively straightforward.
When someone applies for a mortgage to purchase a condo, the lender will also take into account:
- If any of the other units in the condo are currently in foreclosure – and why.
- The financial health of the homeowners association:
- Do they have healthy financial reserves?
- How much do they budget each year for general maintenance?
- Do they have adequate insurance?
- Are the funds generally managed responsibly?
- Is there a large amount of homeowner association dues owed by other residents?
- Are there any pending legal actions against the homeowners association or any of the residents, which could impact the resale value of another unit in the building?
- Does the HOA have adequate documentation?
- What percentage of units in the building are:
- For sale
- Rental units
The lender will consider all of this information, and more, in order to assess the likelihood of the property, increasing or decreasing in value.
Check out our Free Checklists and Questionnaires to get our list of 21 questions to ask your loan officer for a printable checklist.
Condo Financing – Example Requirements
Those lenders that will finance condos usually have a list of qualifications that a condominium must meet. If the development into which you want to buy, doesn’t tick all the boxes, the lender will turn down your application.
The exact detail varies slightly from lender to lender but is somewhere in the region of:
- All construction must be completed.
- The developers must have handed over control of the community to the homeowners association.
- No one person or company can own more than 10% of the units.
- At least 740 of the units must be owner-occupied.
- There must be no more than 10% of residents in arrears with their HOA dues.
- If there is any commercial space in the development, it can comprise no more than 25% of the total square footage of the buildings.
This is what makes it more challenging to obtain a mortgage for a condo.
Can I Buy A Condo With An FHA Loan?
Yes, it is possible to buy a condo with an FHA Insured Loan, and in fact, changes have taken place to make it a little easier.
The new FHA Condo Project Approval Guidelines were released on Aug 15th, 2019, and come into effect on Oct 15th, 2019.
Previously a condo unit had to be part of an FHA approved condominium complex. There are specific criteria a complex must meet before becoming FHA approved, and developers complained the process was too complicated and took too long. As a result, the pool of developments with FHA approval is relatively small – only 6.5% of condo projects in the US.
Now potential borrowers will be able to apply for an FHA insured loan to buy condos that aren’t in an approved condo complex. This “single approval” process can be used only if the condo community is shown to be financially stable.
The next update applies to owner-occupied units. Previously, the FHA required at least 50% of the condo’s units to be owner-occupied. This figure has been taken down to 35%, allowing more projects to qualify as FHA approved condos.
The maximum number of units in a condo project that can be purchased with an FHA insured loan has been raised to 75%. As a result, more people can purchase condos in a single project using FHA insured loans.
These are some of the updated restrictions for FHA loans, but there are plenty of other criteria that applicants and their condos must meet.
- The condo must be the buyer’s principal residence.
- The project must have been completed for a full year at least.
- There can be no other phases of the project pending.
- A maximum of 15% of the units may be in arrears with their association dues.
Can I Get A Mortgage For A Condo In A Project That’s Still Under Construction?
If you want to buy a condo in a community still under construction, you will have to do some research into the smaller lenders in the market. The major lenders will not extend a mortgage on a condo still under construction.
The reason for this is simple.
How Major Lenders Work
The major banks and other large lenders sell mortgages to the public. Once they have sold these mortgages, they bundle them together and sell them on the secondary mortgage market.
An atypical mortgage, such as one for a condo under construction, would not “fit” into one of these mortgage bundles. In this case, the lender would be left holding and having to service such a mortgage.
These huge lenders do not operate in the mortgage serving realm, nor do they want to, so it’s easier for them not to offer such a mortgage in the first place.
How Smaller Lenders Work
Some smaller lenders will make exceptions to their standard mortgage criteria, or they may be able to find an alternative investor who is willing to take on the loan. This is because smaller lenders are more likely to keep the mortgages they sell to homebuyers. Therefore a smaller lender may be willing to extend a mortgage on a condo still under construction.
This type of mortgage is called a portfolio loan.
How To Improve Your Chances Of Securing A Condo Mortgage
There are several ways to avoid finding your dream condo only to discover you cannot get financing. To improve your chances of securing a mortgage for a condo, you can:
- Apply for a mortgage pre-approval or pre-qualification. When you do so, ensure you make it clear that you are planning to buy a condo.
- Interview real estate agents who are experienced with, or who specialize in assisting buyers who wish to buy condos.
- Ask to see a copy of the HOAs documents before making an offer. This is considered good practice for several reasons, but in this case, it will allow you to ask the questions the bank will ask. Doing this will alert you to any potential issues which may affect the financing.
- Save as much as you can for a deposit. Having a deposit of less than 25% will seriously reduce your chances of being offered a mortgage with the majority of traditional lenders, and it will also result in a higher interest rate.
Condos do qualify for financing, but the requirements that the unit, the project, and the mortgage applicant must meet are more stringent than those for a single-family home. The same is true if you are considering a condo reverse mortgage. This is because the other units can impact the resale value of a condo in the project. This, in turn, makes it more difficult for lenders to be confident of getting their money back should a borrower default on their mortgage.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.