How does a condo mortgage work?

What is a condo?

A condominium or condo is a type of residential property located within a community of other units. Condos are privately owned, but owners share common areas and typically pay dues to help maintain those areas. The community is usually run by an association or board and a property management company.

Can you finance a condo?

Provided you qualify, you can finance a condo with a condo mortgage. The same types of mortgages available to single-family homebuyers are also available to condo buyers, including conventional loans and FHA loans.

Condo mortgage requirements

There are many types of mortgages that can help you buy a condo. Here’s a breakdown of each type’s eligibility requirements.

• Conventional condo loan requirements

  • • 3% or 5% down payment (depending on loan structure)

  • • At least 620 credit score

  • • Debt-to-income (DTI) ratio no more than 43%

• FHA condo loan requirements

  • • Must be buying an FHA-approved condo
    • 3.5% down payment with at least 580 credit score or 10% down payment with 500-579 score
    • DTI ratio no more than 43%

• VA condo loan requirements

  • • Must be an eligible active-duty service member, veteran or surviving spouse
    • Must be buying a VA-approved condo
    • DTI ratio no more than 41%

• USDA condo loan requirements

  • Must be buying in an eligible USDA-approved area
  • DTI ratio no more than 41%

What to expect when getting a condo mortgage

More scrutiny in underwriting

The key difference between a condo mortgage and a mortgage for a single-family home: more layers of scrutiny in underwriting. For a condo mortgage, lenders consider not only your financial picture, but also the finances and overall health of the condo community, including whether it’s currently in litigation or experiencing other issues.

For example, conventional condo loan guidelines dictate that no more than 15 percent of unit owners can be 60 days or more behind on their dues, and that the condo association should have an adequate budget.

Some condo mortgage types allow the lender to approve the loan based on an assessment of the unit only, but that doesn’t necessarily make things easier.

“The FHA has a spot approval process to approve a single unit versus the entire association, but it essentially requires the same amount of information and documentation,” says Esther Phillips, senior vice president and director of Sales at Chicago-based Key Mortgage Services. “The VA has its own approval process, with requirements similar to both FHA and conventional financing, but it does not allow for a single-unit approval; the entire project must be reviewed and approved.”

Insurance requirements

In addition to more complex underwriting, you’ll need to obtain condo insurance and the community itself has to meet insurance coverage standards. This usually requires that you or the association provide your lender with a copy of the project’s master insurance policy.

Potential for higher interest rates

When comparing mortgage lenders and rates, you might find some condo loan offers with slightly higher interest rates.

“Rates are typically higher by 0.125 percent to 0.25 percent,” says Steve Nakash, managing director at FBC Mortgage in Denver, Colorado. “That’s because restrictions or assessments imposed by the property’s homeowners association (HOA) or condo association are out of the borrower’s control, which creates a layer of risk for lenders.”

Tips when getting a condo mortgage

1. Research condo properties carefully. Consider the community’s finances and residents, as well as what is and isn’t allowed. “There might be restrictions on what interior renovations you can do, and there will certainly be restrictions on exterior modifications,” says Nick Wemyss, a real estate agent with Intero in Los Altos, California. “For example, if you tour a condo that needs updates, make sure you understand what renovations are allowed before you make an offer.”
2. Explore different financing options and loan types. Depending on whether you plan to use the condo as your primary residence or an investment or rental property, you might have a bevy of choices. “Understand the type of loan you are going to pursue so that you’ll know if the project will have to be approved first, such as by the FHA or VA,” Phillips says.
3. Expect higher closing costs and longer timelines. Typically, the borrower is the one responsible for paying for copies of various documentation. “That could set you back a couple of hundred dollars at closing time,” says Jeffrey Loyd, a former principal at Mortgage Acuity. “Also, because there are additional participants involved in the loan process — such as the condo association and its insurance company — expect longer closing times, often 30 days or more.”

FAQ

• What are the pros and cons of owning a condo?

  A condo can be a more manageable and affordable option compared to a single-family home. Many communities provide on-site security and other amenities like a gym, workspaces and social gathering areas. There are drawbacks, however, including association dues, property usage restrictions and potentially less privacy.

• Can I refinance my condo mortgage?

  Yes, you can refinance your condo mortgage. It works similarly to a refinance for a single-family home, giving you the option to lower your interest rate or change your loan term. You can also refinance to tap your equity.

• Can I use a condo mortgage to purchase a vacation or investment property?

  You can use a condo mortgage to buy a vacation or investment property, but you’re limited to conventional loans. In addition, because this is a second property, be prepared for a higher down payment requirement and interest rate.