Buying a condominium—better known as a condo—can have a lot of advantages over a traditional single-family home: Many borrowers, especially first-time home buyers, gravitate toward buying a condo because the prices are generally much less than those for a single-family home. And because the prices are often lower, so are the down payment requirements, making them more accessible.
But do not assume you can get a loan for any condo you want to buy. Since condos are individually-owned units in a community-owned building, there are naturally some considerations that set them apart in a lender's view.
- Mortgage lenders consider the overall financial health of a condo association, not just the buyer's.
- Your down-payment depends on whether you'll live in the condo, or rent it out as an investment.
- Favorably priced FHA loans are only available for owner-occupied units.
- A building with too many rental units is likely to be rejected for a mortgage.
- Lenders are cautious because condo common areas such as the roof, hallway, and essential systems are owned by a group of people and any of these individuals could default.
What Makes Condos Different
With condos, each owner has full control over the interior of her individual residential unit. But the common areas, such as yards, corridors, and recreational facilities, are jointly owned and managed by the condo association.
When lenders consider whether to issue a loan for a condo, their underwriting process takes into account the financial health and stability of the condo project as a whole. That means they look at the occupancy of the entire building as well as the financial health of the condo association, including what proportion of owners are delinquent in their payments and for how long.
Because of these variables, not every condominium project qualifies for a loan.
Types of Condo Loans
Your intended use of the condo can affect what kind of financing you'll get. Whether your condo will be your primary residence, vacation home, or investment property will determine how much you need to put down. Second homes and investment property will require more expensive down payments, perhaps 10% or 20% (or more) of the purchase price.
Once you've established the type of residential financing you need, there are different kinds of loans to help you with your purchase:
- Federal Housing Authority (FHA) loan
- Veterans Administration (VA) loan
- U.S. Department of Agriculture (USDA) loan
- Conventional loan
Unlike a single-family home loan, a condo loan must account for interconnecting variables, so there are different rules for borrowing for a condo.
FHA Rules for a Condo Loan
Many first-time homebuyers are interested in FHA loans because they offer down payments as low as 3.5% and the credit requirements are looser. However, FHA rules for a condo are stricter than for a single-family home.
Here are a few of the requirements for an FHA condo loan:
- FHA-Approved Condo List: HUD requires the condo to be listed on its FHA approved condominium list. If the condo is not on the list, the borrower will need to seek conventional financing.
- Single-Unit Approval: In some cases, the FHA will approve certain mortgages even if the complex as a whole is not approved, provided that no more than 2 units in a complex of less than 10 are FHA-insured, and no more than 10% are FHA-insured in complexes of more than 10 units.
- Principal Residence: The home must be your principal residence—not a second home or vacation home.
- Percentage of FHA Loans: At least 80% of all FHA loans in the complex must be owner-occupied. If too many FHA-insured units are turned into rentals, FHA will not approve the loan.
- Percentage of Owner-Occupied Units: A minimum of 50% of the units in the complex must be owner-occupied.
- Concentration of FHA Insurance: No more than 50% of the units in a complex may be FHA-insured.
- Commercial Space: No more than 35% of the building or complex can be commercial/non-residential space.
- Construction Completion: The project must be completed for at least a year, with no additions or phases pending. This means their ales in the complex will probably be purchased with cash or by non-FHA types of financing.
Be aware that not only do the rules for a condo loan vary between FHA loans and conventional loans but also each lender's investor may have her own set of rules (called overlays). Also, just because FHA says you can get a condo loan does not mean the lender you have chosen will agree to fund such a loan. Carefully vet your lender before moving forward with the approval process.
General Condo Loan Rules
If you can't get an FHA loan for your condo, you can still apply for conventional financing. Whether you obtain FHA or conventional financing, some condo loan rules are the same:
- HOA delinquencies: In complexes where values have fallen across the board, dues are generally delinquent for those in short sale status or which are bank-owned. Percentage minimums apply, and generally, at least 85% of homeowner association dues must be in paid on time.
- Pending legislation: Lenders don't want to see pending legislation in a condo complex, because lawsuits can be costly and time-consuming to resolve.
- Restrictive covenants: A restrictive covenant is a set of rules laying out what actions the real estate buyer must take or abstain from. Many banks will only lend money if the purchase is transferred "in fee simple," which means without restrictions or claims against the property.
- Appropriate insurance coverage: The complex must maintain appropriate insurance such as hazard, liability and flood insurance.
Since condos are one part of a multi-unit endeavor, lenders see them as riskier than single-family homes. That's why, on top of needing a stable income and decent credit for yourself as a borrower, your chosen condo project must be in good financial health as well.