Condo loans: Defined and explained

A condominium, or condo, is a popular type of residence for urban professionals and young couples investing in first-time homeownership.

They’re a frequent choice for many homeowners and seem similar to apartments. But there are some key differences to keep in mind if you apply for a condo loan.

What is a condo?

Condos are buildings that are divided into and made up of individually owned units. Although similar to apartment buildings, condo units are the property of a specific owner as opposed to a landlord or property management firm.

Condo owners own only the portion of the structure – specifically, the interior of their residence.  A condo or homeowners association (HOA) typically owns and manages external and shared areas of the property.

The role of a condo HOA

A condo association or HOA is effectively a group of owners who collectively work together to set and enforce building rules and guidelines. They shoulder the burden for any shared expenses.

A condo owner is responsible for everything that goes on inside their unit, including maintenance and repairs. They also pay regular fees to the condo association for upkeep of shared areas, which are the HOA’s responsibility to maintain.

How condo ownership and co-ops differ

Condos are often mistaken for co-ops, but they are not the same. Case in point: Although you’ll often find co-ops in multi-unit buildings, these structures differ from condos because co-op owners instead possess an interest or share in the entire building.

In other words, condo owners own the individual unit that they occupy. Co-op owners do not.

The Appeal of condos

First-time home buyers often like condos because they’re often smaller, more affordable and less demanding to maintain than single-family residences.

In general, condo owners are responsible for abiding by the HOA’s rules, being respectful to their neighbors and maintaining their individual residence.

How does condo financing work?

Condo mortgage loans help condo buyers finance their purchase, which can be used as primary residences, vacation homes or investment properties.

How you plan to use the condo can influence how much you’ll need for a down payment – and what kind of financing you might get. Buying a condo as an investment property or vacation/second home will likely mean a higher down payment.

Condo loans differ from traditional mortgages

Rules and qualifications for condo loans are often different from traditional mortgage policies. Mortgage lenders will consider a variety of factors when evaluating whether to finance your loan. These factors might include, but are not limited to, the property’s:

• Age
• Structural integrity
• Amenities
• Grounds
• Current finances

For example, a bank determining whether to finance a condo loan may wish to see the building’s proof of insurance, HOA meeting notes and budgets along with information about current or future proposed special assessments (includingpending bills that will be levied against owners).

Still, borrowers can apply for condo loans through the same programs as any other type of home.

Warrantable condos require more effort

A warrantable condo is one that potential home buyers can finance and underwrite using a conventional mortgage. First, though, the condo must meet minimum guidelines laid out by traditional mortgage investors like Freddie Mac and Fannie Mae. For example, sample guidelines include stipulations such as:

• No single entity can own more than two units in projects consisting of five to 20 units, or 20% of units in projects consisting of 21 or more units.
• At least 50% of the units are owner-occupied as opposed to being investment properties.
• Less than 15% of total units are 60 days or more in arrears on association dues.
• The homeowners association (HOA) is not named in any lawsuits.
• Commercial space accounts for 35% or less of the total building square footage.

Freddie Mac and Fannie Mae consider non-warrantable condos a risky acquisition because they’re harder to buy and sell. You may have to seek other financial assistance beyond what traditional lenders offer if you want to buy a non-warrantable condo. Feel free to speak to one of our Home Loan Experts about your options.

What types of condo loan programs are available?

The type of condo that you wish to buy and how you plan to use it will impact the type of financing that you need. Once you’ve narrowed your choices down, there are several different types of loans available:

• Conventional loan: A traditional fixed-rate or adjustable-rate mortgage (ARM) requires a certain minimum credit score and debt-to-income ratio.

• FHA loan: Federal Housing Authority (FHA) loans are federally backed loan products with less stringent credit requirements and lower down Remember that FHA condo rules are stricter than the FHA’s single-family home rules.

• VA loan: Department of Veterans Affairs (VA) loans are for members of the military, veterans and eligible surviving spouses. Federal government backing allows applicants to obtain more favorable terms from lenders.

• USDA loan: The U.S. Department of Agriculture (USDA) offers loans to property owners in select rural areas. These loans typically allow low-income Americans with poor credit to get low-interest mortgages and zero down payments. Rocket Mortgage® does not offer USDA loans at this time.

The pros and cons of buying a condo

Purchasing a condominium is often a good bet for families just starting out or individuals who want to avoid too much home maintenance. Here’s a look at some pros and cons.

Pros

• No exterior property maintenance or need to upkeep grounds

• Often cheaper than a single-family home

• Access to building amenities

• Shared cost of select building expenses

• Less stressful to leave unoccupied for frequent travelers

Cons

• Higher monthly fees and HOA dues, plus occasional special assessments

• Close proximity to neighbors

• More rules and restrictions on occupants and guests

• More difficult to resell than a single-family home

• Typically smaller in size than stand-alone residences

Things to consider about condo loans

While often generally comparable to loans extended on single or multifamily houses, it’s not uncommon for condo loans to be more expensive. That’s because condo projects introduce more quirks and restrictions related to shared and/or jointly owned building spaces, making the loans potentially more risky. Other home buying costs may also prove higher for condo loan applicants, including private mortgage insurance, home appraisals and larger down payments.

Prospective condo owners should ask homeowners associations and seller’s agents to provide a full overview of building rules (and finances) before applying for a condo loan. That may mean asking to see important clauses and covenants, pet regulations, information on annual dues, planned expenses and other info.

Some condo associations may also wish to interview potential homeowners.

The bottom line: Risk factors can make a condo mortgage challenging

The added risk factors of condo financing may come with higher interest rates. They’re available from the same lenders who finance homeowners purchasing single- or multifamily homes. If you’re shopping for condos, you may also consider other home options such as apartments.

Navigating a condo purchase can be challenging, so it can help to speak with a lender and real estate professional to weigh all of your options. You can apply online or call us at (888) 452-8179.