How does a condo mortgage work?

·6 min read
A condo kitchen with a modern open-floor plan
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Financing the purchase of a condominium home is somewhat different than the process of buying a single-family home. For one, a condo mortgage usually comes with higher interest rates, and it can also be more difficult to qualify for thanks to additional underwriting.

What is a condo?

A condominium, or a “condo” for short, is a typically more affordable and lower-maintenance alternative to a single-family home. Located within communities of other units, condos are privately owned, but owners share common areas. A key selling point of a condo is that the owner generally only has to take care of the interior of their unit, while a property management company handles the rest.

How does condo financing work?

Condo financing is generally similar to financing a single-family home. In fact, the same type of loans available to single-family homebuyers are available to condo buyers, including:

Condo mortgage vs. other mortgage types

The major differences are that mortgages for condos often involve extra steps and additional paperwork, as well as come with slightly higher interest rates.

“Rates are typically higher by 0.125 percent to 0.25 percent,” according to Steve Nakash, managing director of Denver-based Blue Spot Home Loans, a division of Cherry Creek Mortgage. “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.”

Your lender must obtain additional documents from either the condo association, HOA or management company, as well. These can include:

  • A questionnaire form about the condo project

  • Information on how many units are owner-occupied versus tenant-occupied and how many are owned by one entity

  • A copy of the condo association’s master insurance policy

“Essentially, the lender needs to approve both the individual buyer and the condo project for financing,” Nakash says.

To do that, the condo project itself must be vetted and meet lender standards. For example, current lending guidelines dictate that no more than 15 percent of unit owners can be behind on their condo dues, and one investor can’t own more than 10 percent of the units, according to Jeffrey Loyd, principal of Mortgage Acuity, a mortgage broker in Hackensack, New Jersey.

Plus, the condo must maintain insurance coverage standards and not be a party to litigation that could result in financial loss to the condo association.

“Lending guidelines don’t allow for condo buildings that allocate more than 35 percent of its square footage to commercial space,” adds Loyd. “That’s because lenders think having a big slice of the building’s income sourced from one or more commercial tenants can be risky to them.”

In some cases, a full review might be required, which will involve obtaining additional paperwork from the HOA or management company, such as budget reports and a Covenants, Conditions and Restrictions (CC&R) document.

Condo mortgage requirements

To qualify for condo financing, you have to meet specific requirements for the type of loan you’re pursuing. Here’s a breakdown of the different eligibility requirements involved, according to Orlando Miner, principal of Miner Capital Funding in St. Louis:

Conventional loan

  • 3% – 5% minimum down payment

  • 620 minimum credit score

  • Debt-to-income (DTI) ratio no more than 36%

  • Condo unit must be your primary residence

FHA loan

You can search for FHA-approved condos through the U.S. Department of Housing and Urban Development (HUD) website. The qualifications for an FHA loan include:

  • 3.5% minimum down payment with a 580 or higher credit score

  • DTI ratio no more than 50%

  • Condo unit must be your primary residence and meet FHA minimum property requirements

“The FHA will require each project to be reviewed and approved by HUD or a delegated institution,” explains Esther Phillips, senior vice president of sales at Chicago-based Key Mortgage Services. “The FHA also 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.”

VA loan

  • You must be a military member or veteran or eligible surviving spouse

  • No down payment required

  • No minimum credit score required

  • No maximum DTI ratio; however, you must have other “compensating factors,” such as a higher credit score, if your DTI ratio exceeds 41%

  • Condo unit must be your primary residence

“The VA has its own approval process, with requirements similar to both FHA and conventional financing,” Phillips says, “but it does not allow for a single-unit approval; the entire project must be reviewed and approved.”

You can search for VA-approved condos in your state through the U.S. Department of Veterans Affairs (VA) search tool. Simply check off “Approved” and then select your state for a list of projects.

USDA loan

  • Property must be in a rural location deemed eligible by the U.S. Department of Agriculture (USDA)

  • No down payment required

  • No minimum credit score required

  • DTI ratio no more than 41%

  • Condo unit must be your primary residence

How to get a condo mortgage loan

To improve your chances of getting approved for condo financing and buying a condo, follow these tips:

  • Research condo properties carefully. “Make sure you are looking to purchase in a well-run, financially healthy condo association that is predominantly filled with owner-occupants,” Loyd recommends.

  • Explore different financing options and loan types. “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,” advises Phillips.

  • Expect increased closing costs and closing times. “The borrower must pay for documents needed from the condo managing agent, such as the condo questionnaire, condo financial statements and insurance binder for the building as a whole,” Loyd notes. “That could set you back a couple of hundred dollars at closing time. 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.”

Bottom line

Condos have some key advantages over single-family homes, including lower price tags and fewer maintenance hassles. That said, prospective condo buyers should be prepared for extra effort during the mortgage application process. Expect more scrutiny of your finances as well as the condo community itself. Whether or not the extra legwork is worth it depends on your needs and preferences as a homeowner.