Do Condos Have Mortgages? How They Work

Purchasing a condominium offers benefits like shared amenities and reduced exterior maintenance. While financing a condo is similar to buying a house, securing a mortgage introduces unique considerations. Lenders evaluate both the borrower’s financial standing and the condominium project’s health and characteristics. This dual assessment differentiates the condo mortgage process.

Understanding Condo Mortgages

A condominium involves owning a specific unit’s interior space and a shared interest in common elements like hallways or recreational facilities. Financing a condo requires a two-pronged evaluation. Lenders assess the borrower’s financial qualifications, including credit score, income, debt-to-income ratio, and down payment.

Lenders also scrutinize the financial health and operational characteristics of the entire condominium project and its homeowners association (HOA). This review ensures the long-term stability of the property securing the loan. Unlike a single-family home mortgage, a condo mortgage requires a deeper look into the community’s collective financial and physical state.

Lender Scrutiny of Condo Projects

Lenders perform due diligence on the condominium project and its homeowners association (HOA) to mitigate risk. The HOA must have adequate reserve funds for future repairs, a stable budget, and minimal outstanding debt. Lenders look for associations to set aside at least 10% of their annual budget for reserves. This ensures financial stability and prevents large special assessments.

Owner-occupancy ratios are a factor, as lenders require a minimum percentage of units to be owner-occupied. High owner-occupancy rates indicate a stable community with owners invested in property maintenance. Many lenders, including Fannie Mae and FHA, look for at least 50% owner-occupancy. FHA may allow as low as 35% under specific conditions. Projects with too many investor-owned units are higher risk.

Litigation involving the HOA can impact mortgage eligibility, especially if it concerns structural defects or financial disputes. Major lawsuits can lead to loan denials from conventional lenders. Lenders also limit the percentage of commercial or non-residential space within the development. Conventional guidelines often limit commercial space to around 35% to ensure the property remains primarily residential.

Lenders also limit single-entity ownership to prevent excessive control and ensure diversity. For example, Fannie Mae stipulates no single entity can own more than 10% of units in projects with 21+ units, or two units in projects with 5-20 units. Adequate insurance coverage is required, including a master policy for common areas and the building structure, hazard insurance, and liability insurance. Fidelity insurance, protecting HOA funds from fraudulent acts, is also often required for larger associations.

Common Condo Mortgage Programs

Several mortgage programs are available for purchasing condominiums, each with specific requirements for the borrower and the condo project. Conventional loans adhere to guidelines set by Fannie Mae and Freddie Mac. These guidelines classify condos as “warrantable” if they meet criteria related to financial health and owner-occupancy, making them eligible for conventional financing. Conventional loans require a credit score of at least 620, with down payments as low as 3%. A 20% or more down payment helps avoid private mortgage insurance.

Federal Housing Administration (FHA) loans are an option for buyers with lower down payments or credit scores. For a condo to be eligible for FHA financing, the entire project must be on an FHA-approved list. FHA has specific requirements for reserves, owner-occupancy (at least 50%, though 35% is possible with additional documentation), and limits on commercial space. If a project is not FHA-approved, a buyer cannot secure an FHA loan for a unit within it.

VA loans, available to eligible veterans and active-duty service members, also extend to condominiums. The condo project must be on an approved VA list for a unit to qualify for VA financing. These loans offer no down payment requirements for eligible borrowers, but the project must meet the VA’s approval criteria.

For condominiums not meeting “warrantable” criteria for conventional, FHA, or VA loans, some lenders offer “portfolio loans.” These loans are kept on the lender’s books, allowing for more flexible underwriting. Portfolio loans can be a solution for non-warrantable condos with issues like lower owner-occupancy rates, ongoing litigation, or significant commercial space. They may come with different terms, such as higher interest rates or larger down payment requirements.

The Condo Mortgage Application Journey

The condo mortgage application begins with pre-approval. A lender evaluates your financial qualifications, including credit history, income, and debt levels. This assessment determines your borrowing capacity and identifies potential condo-specific concerns. A pre-approval letter clarifies your budget for searching for a condominium unit.

Once a unit is found and an offer accepted, the formal application process starts. This involves submitting personal financial records like tax returns, pay stubs, and bank statements. For a condo mortgage, project-specific documentation is also required. This includes the Homeowners Association’s (HOA) financial statements, meeting minutes, master insurance policy, and Covenants, Conditions, and Restrictions (CC&Rs). These documents help the lender assess the condo development’s health and stability.

After application submission, an appraisal of the unit is conducted, considering comparable sales. Simultaneously, the lender reviews the condo project’s documentation. This project review assesses the HOA’s financial health, legal standing, and operational policies to ensure the project meets eligibility standards. The underwriting phase combines the borrower’s qualifications with the condo project’s approval, leading to a final loan decision. Upon approval, the closing process involves signing documents, disbursing funds, and transferring ownership.