How is condo financing different from a mortgage on a house

How is condo financing different from a mortgage on a house?

In contrast to buying a single-family home, condo financing has a few distinct differences due to the shared nature of the space, which influences what loan programs you can qualify for, how the property is appraised and your interest rate, among other factors. Learning more about condo mortgage requirements can help you make an informed decision.

Buying a condo: What makes condo financing different?

Condos are individually owned units within a larger building or complex, not to be confused with apartments or townhomes. Apartments are usually rental units, while townhomes are attached homes.

Condo financing can be similar to financing a single-family house. Generally-speaking, both home types can often be financed with Conventional, FHA, VA, USDA, and Jumbo mortgages. Minimum credit score and DTI (debt-to-income ratio) requirements may also be comparable.

"But when financing a single-family home, the primary underwriting focus is on the borrower," Adam Rosenblatt, Senior Loan Officer and condo specialist at Guild Mortgage, says. "So long as the borrower qualifies and the property appraises at value, there's little left to worry about. When financing a condo, it's a different story."

The condo underwriting process is split 50/50 between the borrower and the condo project, Rosenblatt explains. This essentially turns the condo project into a de-facto co-borrower on the loan.

Here are a few specific areas where condo financing is different:

Appraisal process

A condo appraisal involves evaluating not just the individual unit but the entire condo project, including shared areas and amenities. Factors like the condition of common areas, the structural integrity of the building and the Homeowners' Association (HOA) all influence the unit's value.

HOA

A HOA can impact approval, as well as your monthly payment. Like how HOA fees affect single family homes, your loan officer will include condo HOA fees when calculating the amount you qualify for. However, since the HOA manages the shared areas, and the condo building itself is also being assessed for the loan, more scrutiny is applied to the HOA itself.

"A lender is required to evaluate a condominium's annual budget, balance sheet and the financial health of the association," Rosenblatt says.

Insurance requirements

To finance a condo, you'll be required to have condo insurance in place. This insurance typically needs to cover the interior of your unit and your personal belongings, while the HOA's master policy covers the building's exterior and common areas. Along with a HOA's financial health, a condo's master insurance policy can also impact financing approval.

Interest rate

Another factor that influences affordability is your mortgage interest rate. A mortgage for a condo may have a higher interest rate due to condos being perceived as somewhat riskier properties than single-family houses. We know condos.

Find your local loan officer to start a conversation.

How does condo property type affect its financing?

Condo financing may have different requirements, depending on the condo type:

Non-warrantable condos

A non-warrantable condo doesn't meet Freddie Mac/Fannie Mae Conventional guidelines due to the following characteristics:

• Still under construction
• Involved in ongoing litigation
• Most units rented to non-owners
• Large percentage of units owned by a single entity
• Excessive non-residential spaces, including office and retail
• Developer hasn't transferred HOA control

Because of this, non-warrantable condo financing usually has a higher interest rate and requires a larger down payment. To find out if a condo is warrantable or not, just ask your loan officer. They can initiate a project review to evaluate the property's eligibility.

Condotels

"A 'condotel' is a hotel building where each individual room can be purchased by independent owners," Jeffrey Brown, Senior Loan Originator at Guild Mortgage who specializes in condominium and condo-hotel financing, says.

With condo-hotel financing, owners can typically occupy their unit but may also participate in a rental pool, renting to hotel guests. For frequent hotel guests, it can make sense to own a unit in a building you're already using. For investors wanting a second home, a condotel may be an ideal compromise.

But because condotels are prohibited by Conventional mortgage guidelines, condotel buyers immediately lose access to all Conventional financing. The bigger problem, Brown says, is that most buyers are totally in the dark about this-and may remain unaware until the day their Conventional loan is declined. This is another reason to work with your loan officer to vet the property first to see which loan program it may qualify for.

New construction

New condo construction financing is used when purchasing a condo unit from a builder or developer, typically prior to the building being constructed. To finance, a buyer signs a contract based on builder plans and puts down a deposit. In exchange, they receive a lower, pre-construction price.

"Most buyers expect to have access to Conventional mortgage products, but this isn't always the case with condo construction financing," Brown explains. "In Florida, for instance, the builder must submit their project directly to Fannie Mae for approval before a buyer can get a Conventional loan. Surprisingly, not many builders, or even buyers are aware of this requirement."

"Fortunately, though, we not only make them aware of it when we are their preferred lender, but we can even coordinate the entire and often complicated process with Fannie Mae, where we have had unparalleled success delivering the necessary approvals to ensure that Conventional financing is available to their buyers."

How do condo financing requirements differ by loan program?

Agency-type condo financing refers to loans that adhere to the guidelines set by Fannie Mae and Freddie Mac. These guidelines outline the requirements for condo properties to be eligible for financing, such as the percentage of units that must be owner-occupied, the financial health of the HOA and the building's overall condition. Properties eligible for agency-type condo financing may have more favorable terms and rates.

Condo financing approval can also depend on the loan program a homebuyer qualifies for. While not an exhaustive list, here are some examples:

So, how can we help?

Get in touch with a local loan officer to learn more about your condo financing options.

Adam Rosenblatt NMLS #339515 and Jeffery Brown NMLS #317188 are condo specialists in Boca Raton, Florida.