For those who have bought a condominium unit in the past for the very first time they might have soon discovered that condominium units, or condos, are a bit of a different breed as it relates to obtaining financing. It’s certainly not impossible nor is it more expensive to finance a condo but there typically are a few more steps that have to be covered before a lender will place a condo loan. The key however is to do your research ahead of time about a prospective purchase so you’ll know in advance what to expect.
A condominium project is a bit different compared to a single family home sitting on a lot. Besides the physical differences, there are some legal ones. With a single family home, the owners own both the structure and the land upon which it sits. A condominium owner owns the interior space of the individual unit, called “walls in,” and shares equal ownership with the other owners of the common areas. Common areas in a condominium project are things such as a swimming pool, workout facility and pathways, stairs and sales and management offices. Condos require buyers to follow specific rules that govern ownership and these rules are laid out in the condo’s Covenants, Conditions and Restrictions, or CC&Rs. What sort of rules? Most are fairly typical and easy to follow but a few not so much. A condo can require owners that no furniture be left on the outside deck and if so what colors the furniture may be. A single family home owner can paint the front door bright red but with a condo that’s probably not going to fly.
Financing a condo generally comes in the form of government-backed, conventional and portfolio. Government-backed loans for condos include VA and FHA mortgages. These two programs require very little cash to close. VA mortgages don’t require a down payment at all and the veteran is restricted from paying certain closing costs, keeping cash to close as low as possible. FHA loans ask for a down payment of just 3.5% of the sales price.
In both instances of a VA or FHA loan, the entire property must be approved by the VA or FHA, whichever loan is being used. Both the VA and FHA keep an online database showing which condo projects are already approved. Simply log onto their site and enter in the projects name, address and city. If the project is approved, the loan process is relatively simple and the lender proceeds with the loan approval much like any other loan. When entering the property information, the response can be Accepted Without Conditions, HUD Accepted or Unaccepted.
Accepted Without Conditions means the project has already been reviewed and approved by the VA and borrowers can use a VA loan to finance the purchase. HUD Accepted means the project has been previously approved for FHA financing. If a project has HUD approval, the VA accepts HUD’s approval as its own.
If the project is not on any approval list, the lender then sends out a questionnaire to the condo management. Among the questions include how many of the units are occupied by the owners and how many are rented out. To meet VA standards, at least 50% of the units must be occupied by the owners. One of the questions also asks if any of the owners are delinquent with their homeowner’s association, or HOA dues. If more than 15% are in fact more than 30 days behind, the project cannot meet VA guidelines. And for newly constructed projects or apartment conversions at least 75% of the units must be presold.
FHA guidelines follow much the same approval procedure as VA loans do. No more than 15% of the owners can be behind with their HOA dues and no more than 50% can be rented out. However, recent changes to FHA guidelines reduce the owner occupancy requirement from 50% to 35% as long as the project is stabilized and in existence for at least three years. Like the VA loan, if the project appears on FHA’s condo approval website, the loan process is much like any other. There are other restrictions but these are the most important. The lender sends out a questionnaire as well.
Portfolio loans do not follow any third party requirements and don’t have to meet occupancy guidelines such as VA and FHA require. Lenders who issue portfolio loans can’t sell the loans on the secondary market but instead intend to keep the loan in-house or otherwise approve a loan using another portfolio lender’s guidelines.
Portfolio loans however typically require a sizable down payment ranging anywhere from 30 to 50% of the sales price of the unit. Portfolio loans are usually used when all other financing options have failed.
Conventional loans are those where the individual lender takes on the risk of approving a loan. There is no guarantee to the lender like government-backed loans have. Fannie Mae and Freddie Mac are the largest buyers of conventional mortgages taking up more than two-thirds of the entire mortgage market share. Traditionally however, conventional loans ask for a down payment of at least 5.0% or even more based upon the credit score of the buyers.
Yet Fannie Mae has made some adjustments with its relatively new Conventional 97 loan and can be used to finance a condo as well. As the name implies, the Conventional 97 loan finances 97% of the sales price meaning the down payment is only 3.0%. While that’s not a zero down payment for a VA loan, the VA program is reserved for veterans, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and surviving spouses of those who have died while in service or as a result of a service related injury. Without VA eligibility, the VA loan is not available. If the project is not FHA approved, the process to get an approval on an existing project takes time.
The Conventional 97 is only available as a fixed rate loan but in today’s environment that’s probably what you should select anyway. The Conventional 97 is also reserved for first time buyers and the buyers must occupy the property as a primary residence and the loan is capped at the conforming maximum, currently at $453,100 in most parts of the country.
Conventional 97 rates and terms are extremely competitive and when combined with only a 3.0% down payment it’s an attractive option for those looking at a condominium purchase. Look beyond a VA, FHA or portfolio product. The Conventional 97 just might very well be the best choice for those wanting to close on a condo with as little cash to close as possible.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email email@example.com your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email firstname.lastname@example.org.