Condo loans: How condo financing works

Condos appeal to young professionals, retirees, and first-time homebuyers for their affordability and convenience. But condo financing works differently than traditional home loans. Lenders evaluate not just your finances, but also the condo association's health, which can affect your down payment, timeline, and interest rate.

This article explores what makes condo loans unique and the key pros and cons of condo ownership.

Key takeaways:

• Getting a condo loan requires a two-step review process where lenders evaluate both your personal financial qualifications and the financial health, safety, and legal standing of the condominium Homeowners Association (HOA).
• Condo developments are categorized as either warrantable or non-warrantable depending on whether they meet Fannie Mae and Freddie Mac standards for lower down payments and standard interest rates.
• You can finance a condo purchase using conventional, FHA, or VA loans, but you’ll need to factor monthly HOA dues and potential special assessments when determining affordability.

What is a condo?

A condo is one of several units within a larger building or complex with shared spaces. Condo buildings can be high-rises or multibuilding complexes that are divided up into separate living spaces.

Although condos resemble apartments, the key difference is the interior unit is owned by the resident as opposed to a landlord or property manager. This gives condo owners the opportunity to build equity.

The building and shared areas outside the unit are typically owned and managed by a condo or homeowners association. However, this also means the condo owner is responsible for all repairs within the unit.

When you buy a single-family home, you typically own the entire house and the land it sits upon. With a condo, you own only the interior of your unit, and you’re not responsible for maintenance and repairs for the rest of the building.

Condos also differ from townhouses, which are a type of single-family home that shares at least one wall with another home. Townhouses are typically multiple levels where you own the house itself and the land it sits on, so you’re responsible for that exterior maintenance.

The role of a condo HOA

A condo association or HOA includes all the owners in a condo building or complex. The association members manage the common areas of the building and set and enforce rules and guidelines. The condo association splits the cost of maintenance and repairs among all the owners. It’s typically led by an elected board that oversees an annual budget, deciding how members’ dues are spent, planning future renovations, and ensuring unit owners follow the rules.

Condo associations typically hire a property management company for day-to-day operations and rule enforcement. Condo owners pay monthly dues for the upkeep of shared areas and other property costs, like maintenance, homeowners insurance, water, and trash pickup. While the building itself must be insured, and that cost is split, condo owners must have their own separate policy to cover the interior of their unit.

The details, solvency, and management of the condo association can affect your ability to qualify for a loan. For instance, lenders include HOA dues in their calculation of how much home you can afford. The HOA budget, reserve information, delinquency rate, master insurance policy, pending special assessments, and any litigation disclosures also factor into your qualifying.

How condo ownership and co-ops differ

Condos are often mistaken for co-ops. 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. Co-ops usually require different financing than condos, so make sure you understand the type of property you are considering early in the process.

The appeal of condos

First-time home buyers often like condos because they’re usually smaller, more affordable, and less demanding to maintain than single-family homes. Upkeep on condos is managed by the association, so owners don’t have to worry about exterior maintenance or landscaping. Condos may also be appealing to those who enjoy apartment-style living but want to start building equity with their monthly payment. You get to keep that same community structure, which helps provide a smooth transition from apartment dweller to homeowner.

How do condo loans work?

Buyers can use condo mortgage loans to finance their purchase of a primary residence, vacation home, or investment property. 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 or second home will likely require a higher down payment.

How lenders review you

Just like any standard mortgage application, your lender will assess your personal income, assets, credit history, and debt load. However, your lender will also add the condo's monthly HOA dues directly to your proposed principal, interest, taxes, and insurance (PITI) costs to calculate your total monthly debt-to-income (DTI) ratio.

How lenders review the condo project

Because your individual unit is tied to a shared building and common grounds, the financial health of the HOA directly impacts your property's value. Lenders require the condo association or property management company to complete a detailed condo questionnaire. This document confirms the project's insurance coverage, annual operating budget, cash reserve levels, owner-occupancy percentage, and any ongoing legal disputes or pending special assessments.

How property use affects condo financing

How you plan to use the condo plays a significant role in your loan terms:

• Primary Residence: Lowest down payment requirements, typically 5% - 10% for conventional loans, 3.5% for FHA loans, and 0% for VA loans.
• Second Home / Vacation Property: Requires higher minimum down payments, typically 10% to 15% and stricter credit benchmarks.
• Investment Property: Carries the highest risk for lenders, usually requiring a minimum 15% - 25% down payment and higher interest rates.

Condo loan requirements

The qualification requirements for a condo loan will depend on the type of loan. While the exact eligibility criteria will vary depending on the lender, here are some typical thresholds you can expect to need to meet for these common loan types.

Warrantable vs. non-warrantable condos

Whether a condo is classified as warrantable or non-warrantable is a major factor in determining your loan options.

What is a warrantable condo?

A warrantable condo is one that home buyers can purchase using a conventional loan. To be warrantable, the condo must meet minimum guidelines laid out by Freddie Mac and Fannie Mae, two government-sponsored enterprises that guarantee most mortgages. For example:

• At least 50% of the units are owner-occupied primary residences.
• No single owner can hold more than 10% of the units in the complex.
• Commercial space does not exceed 25% of the building’s square footage.
• The homeowner’s association is financially stable and has cash reserves.
• Less than 15% of the condo owners are behind on paying HOA dues.
• There are no active lawsuits against the HOA.
• The complex has sufficient insurance coverage.

What is a non-warrantable condo?

A non-warrantable condo fails to meet one or more of Fannie Mae or Freddie Mac's standard criteria. Common triggers for non-warrantable status include high rental concentration, ongoing structural lawsuits, low HOA financial reserves, high fee delinquency rates, or operating as a short-term hotel.

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.

What are portfolio loans for condos?

Because major government-backed entities will not buy non-warrantable loans, buyers typically need portfolio financing. A portfolio loan is held directly on the lender's own balance sheet rather than sold on the secondary market. Portfolio condo loans typically require down payments of 25% - 30%, higher credit scores, larger cash reserves, and higher interest rates to compensate for the added risk.

How condo loans differ from traditional mortgages

Getting a mortgage for a condo works differently than it would for a single-family home because the condo is part of a larger complex. When you buy a house with a traditional mortgage, your lender reviews your finances to make sure you can afford to repay your loan. When you buy a condo, the lender is going to include the condo project in the underwriting process.

Because your condo is tied to the rest of the complex and the association that runs it, it’s seen as riskier for lenders. Still, borrowers can apply for condo loans through the same programs as any other type of home.

Appraisal and condo questionnaire review

Mortgage lenders will consider several different factors about the condominium development when considering whether they will approve a loan. These property factors might include:

• Age
• Structural integrity
• Amenities
• Grounds
• Insurance
• Current finances of the association

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, including pending bills that will be levied against owners. Many lenders use a condo questionnaire, completed by the HOA or management company, to confirm these details.

Insurance requirements

Insurance policies for the building itself can also factor into the lender’s decision. Since you only own your interior unit, your lender will want to see that the rest of the building is insured as well. While a master insurance policy covers buildings and common areas, you typically need an HO-6 insurance policy to cover your unit’s interior and your personal property.

• HOA master insurance policy: Maintained by the association to cover the building exterior, roof, shared hallways, elevators, and outdoor common grounds.
• HO-6 condo insurance policy: Purchased individually by you and often called "walls-in" coverage, this protects your unit's interior walls, fixtures, cabinetry, flooring, appliances, and personal belongings.

Potential rate and down payment differences

Because condos are perceived as higher risk, condo loans can require higher down payments and come with higher interest rates. While mortgage rates vary depending on the market and the lender you work with, you can expect the rate for a condo to be anywhere from 0.125% to 0.25% higher than the rate you’d get for a single-family home.

What types of condo loans 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. Here are some common types of loans you can use to buy a condo:

• Conventional loan: This is a loan that is not insured, or backed, by a government program, like the FHA, VA, or USDA.
• FHA loan¹: Federal Housing Authority (FHA) loans are federally backed loan products with less stringent credit requirements. Keep in mind that FHA condo rules are stricter than the FHA’s single-family home rules.
• VA loan²: Department of Veterans Affairs (VA) loans are for military members, veterans, and eligible surviving spouses. Federal government backing allows applicants to get a lower interest rate without making any down payment.¹
• 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 low credit to get low-interest mortgages for zero down payment. Rocket Mortgage does not offer USDA loans currently.

Non-warrantable condo financing

It’s possible to get financing for a non-warrantable condo, but you’ll typically have fewer lender options. You’ll also typically need to pay a higher interest rate and make a larger down payment.

If you have your heart set on a condo and find out its non-warrantable, be prepared to make a down payment of at least 20% - 25% and pay an interest rate that’s typically 0.5 to 1.5 percentage points more than the rate for a warrantable condo loan. Feel free to speak to one of the Home Loan Experts at Rocket Mortgage about your options.

How to get a mortgage loan for a condo

Following a structured approach simplifies the condo buying process.

1. Decide how you’ll use the condo: Confirm whether the property will serve as your primary residence, a vacation secondary home, or an investment rental, as this dictates down payment and credit guidelines.
2. Ask for HOA documents early: Request the condo association's budget, master insurance policy, meeting minutes, reserve study, and litigation disclosures as soon as you express interest in a unit.
3. Work with a condo-friendly lender: Partner with an experienced mortgage company that understands condo questionnaires and agency warrantability standards to avoid closing delays.

The pros and cons of buying a condo

Purchasing a condo can be a great move for individuals and families who want to become homeowners without taking on all the home maintenance obligations. Let’s review some of the pros and cons of this home type.

Condo pros

Some of the advantages of buying a condo include:

• Often less expensive than a single-family home
• Minimal exterior maintenance
• You build equity over time
• Access to building amenities
• Shared cost of select building expenses
• A community living experience
• Less stressful to leave unoccupied for frequent travelers
• The HOA may cover exterior master insurance and some utilities, although coverage varies.

Condo cons

Some of the downsides of condo ownership include:

• Possible higher down payment requirement
• Possible higher interest rate
• Higher association dues
• Occasional special assessments
• Close to neighbors
• More rules and restrictions on occupants and guests
• More difficult to resell than a single-family home
• Typically, has less square footage than stand-alone residences
• Potential restrictions on home businesses, pets, and vehicle types
• Financing may require HOA documentation and can take longer than a house purchase.

FAQ

Here are the answers to some frequently asked questions about buying a condo.

Is it hard to get a loan on a condo?

Getting a condo loan does not have to be more difficult, but it requires extra underwriting time because lenders must review both your personal finances and the HOA's financial records.

Can you get a 30-year mortgage on a condo?

Yes. Standard 30-year fixed-rate mortgages are widely available for warrantable condominiums.

Can you refinance a condo mortgage?

Yes. You can do a rate-and-term or cash-out refinance on a condo, provided the development currently meets lender warrantability guidelines and you have sufficient home equity.

The bottom line: Condo loans can require extra steps

Condos can be a great option for buyers who are ready to become homeowners who also appreciate some of the aspects of apartment-style living. Because a condo is tied to the complex it’s a part of, it introduces added risk to the lender. This can result in higher interest rates and larger down payment requirements. Still, these loans are available from the same lenders who finance homeowners purchasing single- or multifamily homes.

If you think a condo is the right home for you, you can apply online or speak with a Home Loan Expert to weigh all your options.

¹To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be need, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.