Condominiums offer an excellent property investment option. However, financing the condo can be daunting. Many mortgage lenders are reluctant to offer loans on condos because they view condos as higher risk than typical single-family homes. Additionally, the loan approval process of a condo follows a stringent procedure because the lender needs to conduct a condominium review depending on the loan policy.
Finding a Lender for Your Condo Loan
Most American lenders have specific policies governing condo financing. Whether you decide to go for a government loan (FHA or VA) or a conventional loan, a condo loan undergoes a special underwriting process.
A private lender can provide FHA loans or conventional loans. The main difference is that FHA mortgages have government-backed insurance, while conventional loans do not. Therefore, conventional mortgage loans cannot be guaranteed by the government. However, insured conventional loans do exist. In such cases, the insurance comes from a private, third-party entity, not the government. This is what’s referred to as Private Mortgage Insurance (PMI).
When you apply for the loan, the lender evaluates your loan payment abilities to make sure that:
- You have the financial power or credit to repay the mortgage
- The property you purchase is in good shape to warrant the risk
When hunting for a conventional residential property, the lending process follows a straightforward procedure. The bank appraises the property to ensure it’s worth the estimated value and assesses the title to ensure its clean. In condo financing, the lender focuses mainly on whether they can secure the money in the event of default.
Special Underwriting Process for Condo Mortgages
Condo acquisitions depend on several factors. Your financier will pay attention to:
- Homeowner’s association’s charges – Condo owners only own the interior of their unit. Other common areas belong to the association, and all property owners pay monthly maintenance fees. Therefore, if your lender discovers that some units are foreclosures, or fail to pay monthly arrears, that lowers the chances of loan approval.
- Percentage units under owner-occupancy – The lender compares the number of purchased units and unoccupied units to gauge the condo’s potential to hold its value.
- Legal Documents – Condominium management is subject to statutory regulations, and the legal papers vary from one condo to the other. Your lender will be keen to pinpoint some legal policies that may cause the property to depreciate.
Government Loans (FHA and VA) for Condos
Most first time homebuyers prefer FHA or VA loans because they have flexible credit requirements that include a down payment amount of as low as 3.5% of the buying price (for FHA loans) or even zero down payments (for VA loans).
FHA and VA loans have similar lending procedures, but VA loans get approval from The Department of Veteran Affairs. The approval requirements depend on some factors you cannot control. They include:
- At least 50% of the condominium must be owner-occupied.
- Less than 15% of the units have monthly association arrears beyond 30 days.
- Less than 30% of the units in the complex were purchased through FHA.
Conventional Loans for Condos
The credit requirements for conventional loans are more stringent than FHA mortgages. For example, you can only qualify for a conventional loan with a credit score of at least 620. FHA loans require a lower score threshold of 580.
Depending on your lender, borrowers can put as little as 3% down when acquiring a condo. If you choose a down payment that’s lower than 10%, the lender will be compelled to perform a full condo review before approving the loan.
That includes collecting and organizing condo resale papers, the legal policies governing occupancy and utility of amenities. Usually, if you cannot afford these papers, the lender does that on your behalf at a certain fee. Furthermore, the financier needs to fill a Lender Questionnaire, also at a cost.
On another token, you may opt to issue a down that exceeds 10%. This calls for a limited review, which alleviates much of the daunting works and charges associated with a full review. During a limited appraisal, you only need to have answers to the following queries:
- How established is the association?
- Is the condo a new construction or an existing complex?
- Is there open litigation?
- Does 10% of the units belong to a single entity/organization
Investing in a condo is one of the significant business and life choices you can ever make. However, potential condo buyers need to understand how property financing in the condo markets differs from residential properties. Furthermore, you need to evaluate your wants and needs, as well as your budget to decide on which loan to choose – whether a conventional loan or a government FHA/VA loan.