How to Get a Mortgage on a Condo
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 the process can be tricky, we explain how to get a mortgage on a condo including the key points you should focus on to make a potentially challenging process go as smoothly as possible.
Determine if 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
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 (50% for FHA condo project approval) 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
To receive FHA approval, no more than 50% of the units in the condo project can have an FHA mortgage
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, such as the master insurance policy deductible, 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.
Shop Condo Mortgage Lenders
Condo mortgages are provided by traditional lenders including banks, mortgage brokers and credit unions. Not all lenders offer condo loans because of the extra time and documentation involved but many do.
The table below shows mortgage rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to understand if they offer condo mortgages and to learn more about qualification guidelines. Shopping lenders also enables you to compare loan terms and save money on your mortgage.
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Consider an FHA Mortgage (Especially if the Condo Project is Not Approved)
The FHA issued new regulations that enable you to qualify for an FHA mortgage to buy a unit in a condo project that is not approved by the FHA. Qualifying for a mortgage on a condo in a non-approved project is also called spot approval or single-unit approval. Until the FHA revised its policy in 2019, you could not qualify for an FHA loan on a condo in a project that was not approved, so this change in guidelines represents a significant opportunity for condo buyers.
Even though the condo project is not approved by the FHA, the project must still meet multiple requirements, as listed below:
No more than 10% of the individual units in the condo project can have an FHA mortgage (projects with fewer than 10 condos can have a maximum of two units with an FHA loan)
At least 50% of the units in the condo project must be owner-occupied which means investors must own less than half of the units
If the condo project has 20 or more units, no individual or entity can own more than 10% of the units. If the project has less than 20 units, no individual or entity can own more than own unit
Construction on the condo project must be complete and the project must have at least five units
The condo project's commercial space square footage cannot exceed more than 35% of the project's total floor area
The homeowners association (HOA) is required to have sufficient reserves for capital expenditures and maintenance
No more than 15% of units in the project can be late on their HOA dues
The condo project must have appropriate hazard, liability, fidelity (for projects with more than 20 units) and flood (if applicable) insurance policies and coverage levels. Applicants must also purchase a homeowner insurance policy that covers their individual unit (also called a "Walls-In" or HO-6 policy)
The condo project cannot be involved in an active lawsuit that is not covered by its insurance
The condo project cannot have experienced a "financial distress event" such as a bankruptcy or foreclosure within the past three years
The lender is required to submit a five page form called a HUD-9991 (Condominium Loan Level/Single-Unit Approval Questionnaire) that includes the condo project information listed above
If your project meets all of the guidelines outlined above, you can apply for an FHA mortgage on an individual unit even if the overall project is not FHA-approved.
FHA condo loans are provided by traditional lenders such as banks, mortgage brokers and credit unions. We recommend that you contact multiple lenders in the table below to find the best mortgage terms.
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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.
Get Pre-Approved for the Mortgage
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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Learn How a Homeowners Insurance Policy for a Condo Works
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 homeowners 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 a fire, the cost of rebuilding the physical structure is covered the master insurance policy and HOA reserves 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.
Know 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. If the condo is non-warrantable your first step should be to determine if you can qualify for individual unit financing with an FHA mortgage.
If an FHA loan is not an option for you then you need to work with a lender that offers non-warrantable condo loans. In short, because they involve greater risk, a relatively small number of lenders provide mortgages for non-warrantable condos. You may need to search around to find lenders that offer this 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.
Sources
"Condo, Co-Op, and PUD Eligibility." Originating & Underwriting. Fannie Mae, 2019. Web.
"FHA Issues New Condominium Approval Rule." HUD No. 19-121. U.S. Department of Housing and Urban Development, August 14 2019. Web.