Condominium Loans

BySapna

This BLOG On Condominium Loans Mortgage Lending Guidelines Was UPDATED On April 23rd, 2019

Mortgage lenders view condominiums loans differently than single family home mortgage loans.

  • Condominiums are considered riskier investments than townhomes and single-family homes
  • Many first time home buyers gravitate towards condominium purchases as their first home purchase
  • Main reason is due to the lower market price with condominiums
  • But one of the things they do not take into consideration is that condominiums have mandatory homeowner association dues
  • This can greatly impact the buying power of the subject condo

Condo Versus Single Family Home Purchases

  • A first time home buyer who is limited on a monthly housing budget amount of $1,000 can qualify for a $60,000 condo
  • But for the same monthly payment, buyer can purchase a single family home
  • This is because single-family homes do not have homeowners association dues
  • Some of the condominiums charge condo homeowners association dues
  • HOA dues can be as low as $500 or more than $1,000 per month
  • $500 monthly payment is equivalent to a $100,000 mortgage principal and interest payment
  • When considering to purchase a condominium unit, please compare the pros and cons
  • Compare condo purchase to purchasing a single family home
  • Take the condo homeowners association dues into consideration

Mortgage Borrowers can have the best credit in the world, the best income, and tons of assets but if they are pursuing in buying a condominium, be prepared to jump through obstacles that they would not normally face when buying a single family home.

Choose A Mortgage Loan Originator Experienced With Condominium Loans

There are so many condominium loans that cannot get done at the last minute. The condo home buyer may get denied not due to their credit and income profile but due to the condominium project.

  • A lot of these mistakes can be avoided if the mortgage loan originator will properly qualify borrowers
  • Loan Officer should properly qualify the condominium project prior to issuing a pre-qualification letter and  submitting a real estate purchase contract into processing/underwriting
  • The first thing mortgage loan originator should ask borrowers to do is to complete a condominium questionnaire
  • Here is a condominium questionnaire that mortgage loan originators should ask condo buyers to provide to Condominium HOA Manager to complete
  • A mortgage lender should have an underwriter review this condominium questionnaire form
  • Get mortgage lender approve the condominium project before proceeding to the next step

FHA Approved Condo List And Condo Guidelines

Home Buyers who can only qualify for FHA loan on a condo purchase, the condominium needs to be on the FHA approved condo list.

  • Here is the link to see whether the condominium is on the FHA approved condominium list 
  • If the condominium you want to purchase is not on the FHA approved condominium list, then you cannot get a condominium loan on the subject condo unit
  • You need to go with a conventional loan

At least 80% of all FHA insured mortgage loans in the condominium complex must be owner occupant condominiums.

  • Condominium projects that had initial FHA insured mortgage loan borrowers turn their primary residences into rentals will not qualify for FHA condominium loans
  • Borrowers needs to be owner occupant for at least one year
  • After the one year, homeowners can rent out their condominium and get another owner occupant property

Warrantable Versus Non-Warrantable Condominiums

All condominiums need to be a warrantable condominium in order to be eligible for either a HUD-approved or Conventional approved condominium loans.

  • To be considered a warrantable condo, a minimum of 51% of the condominium units needs to be owner-occupants and not rentals
  • To be eligible for either FHA or Conventional condominium loans, the condominium project needs to be warrantable
  • Non-warrantable condominium loans are available but via portfolio lenders
  • Portfolio lenders are mortgage lenders that hold their own paper
  • Portfolio lenders do not sell their loans to the secondary market to Fannie Mae and/or Freddie Mac

Newer Condominiums: New Construction Condos

To be eligible for FHA condominium loans, the condominium project needs to have been completed for at least one year with no more pending construction phases or new additions in the pipeline.

  • This translates into that initial condominium buyers on new construction condominiums need to either purchase them with cash or non-conforming condominium loans

Restrictions On Condominium Ownership

Even though condo owners might own a condominium unit, they will have restrictions and a set of condominium association rules they need to abide by.

  • Almost all condominiums will have a homeowners association
  • Homeowners associations due needs to be paid in addition to property taxes
  • Condominium mortgage lenders will want to see reserves from the homeowners association
  • Normally want to see that 90% of homeowners association dues are paid timely

Condominium mortgage lenders will frown upon the fact if the condominium complex has a large number of foreclosures and/or short sales. If the condo complex has a large number of foreclosures or short sales, they can deny the condominium loan

  • If the condominium complex or its subsidiaries such as the garage or commercial space has pending litigation or is in bankruptcy, this can affect approving a condominium unit loan
  • Building violations that involve structural issues will also pose a problem in getting condominium loans

The condominium complex also needs sufficient insurance coverage on hazard coverage, liability coverage, and flood coverage.

Appraisal Issues

One of the biggest issues with condominium loans is appraisal issues.  Condominium mortgage lenders only want appraisal comparable sales that are within the condominium complex.  If there is nothing but foreclosures and short sale comps in the condominium complex, that is the comparable sales that need to be used.  This often comes in at lower than the property is worth. It causes problems in getting the condominium loan done and closed.  If there are no comps within the condominium complex, then another condominium unit in a nearby condominium complex can possibly be used but that depends whether the mortgage lender will approve it or not.