Buying a condo might make home ownership more attainable for some potential homebuyers, especially those in cities with a higher cost of living. However, a condo mortgage requires additional steps in underwriting, and some loan programs have specific rules. If you’re a first-time condo buyer, there are a few important things to keep in mind during your loan search.
What Is a Condo?
With a condo, an individual owns a unit within a larger complex and typically pays an association fee to maintain common spaces. Condos that make up one larger building may look a lot like apartments. The biggest difference between the two is ownership.
“An apartment can only be rented by a tenant — usually through a management company — for a set period of time,” explains Andrew Wagner, branch manager for Churchill Mortgage in Maryland. “The apartment building itself is owned by a company, with the tenants living in the apartment units agreeing to pay monthly rent. Whereas with a condo, the individual who owns the condo unit also owns the real estate.”
That said, not all condos are apartment style. In fact, condos can also be completely detached from other units, similar to single-family homes.
Condo Mortgage vs. Other Mortgages
Whether you are buying a condo or a single-family home, you have virtually the same options for a mortgage. Mortgages you could use to buy a condo include:
— Federal Housing Administration loans.
— U.S. Department of Veterans Affairs loans.
— U.S. Department of Agriculture loans.
— Jumbo loans.
Borrower requirements are also similar, says Brian Koss, regional sales director of Movement Mortgage. For example, the lender will pull your credit scores and credit reports, review your income and tax returns, ask about your current debts, and check that you have sufficient assets in your bank and investment accounts.
What makes a condo mortgage different is the underwriting process. Lenders review not only your finances but also the financial health of the condo association for the property you want to buy.
“For example, lenders will review the condominium’s budget to make sure the project is adequately funded, with sufficient income to meet its expenses,” explains Wagner. “Additionally, lenders review the condominium’s master insurance policy to ensure their insurance meets its program requirements.”
[Read: Best Mortgage Lenders]
The biggest difference to consider in financing a condo vs. a single-family home is that you will need to include a condo fee in your budget and mortgage.
“When buying a condo, homeowners must qualify for the principal, interest, taxes, insurance of the loan and the HOA/condo fee,” says Wagner. “Condo fees can vary greatly from building to building, so it’s important to understand what all is included in the fee before proceeding with the purchase. Often, when adding the condo fee to a borrower’s debt-to-income ratio, their buying power is reduced when compared to a single-family home or townhouse.”
[Read: Best Mortgage Refinance Lenders.]
How to Qualify for a Condo Mortgage
Qualifying for a condo mortgage hinges largely on whether the condo meets the lender’s guidelines and your financial situation.
Here’s a look at the requirements of some mortgage options:
FHA Loans
An FHA loan might be appealing if you’re a first-time buyer looking for a loan with a low down-payment requirement. FHA loans typically require only 3.5% down for buyers with a 580 credit score or higher.
The property itself must meet a number of guidelines. For example, at least 50% of the condo units must be owner-occupied, and at least 10% of the HOA budget must be kept in a cash reserve by the condo association. You can use this online tool to search for FHA-approved condo projects.
VA Loans
The VA loan program is designed to help veterans and their families buy a home and may not require a down payment. While VA sets no minimum credit score, lenders typically expect a score of at least 620. The property has to be in an approved condo development, where at least 50% of the units are owner occupied, and fit various other criteria.
The VA has a search tool where you can plug in a condo development’s details to find out if it’s VA approved.
USDA Loans
The USDA guaranteed loan program allows eligible buyers in qualified rural areas to purchase a home, and it doesn’t require down payment. While the program doesn’t set a minimum credit score, individual lenders may have a credit score threshold borrowers should meet.
You can plug the property details into the USDA’s search tool to find out if it’s in an eligible location.
Conventional Loans
A conventional loan is one that isn’t guaranteed by any government agency, such as the VA or USDA. First-time homebuyers can put down as little as 3% to qualify for this mortgage. Just keep in mind how your down payment impacts what you’ll pay for private mortgage insurance. PMI is a type of insurance premium added on to conventional mortgages when your down payment is less than 20%.
Typically, you’ll need a credit score of at least 620 to get approved for a conventional loan.
[Read: How to Get a Mortgage With No Down Payment. ]
How to Get a Condo Mortgage
The process for scoring a condo mortgage is largely the same as applying for any other mortgage. Follow these steps to find the best loan for you:
— Compare lenders. Research potential lenders to find ones with the terms and interest rates that best match your needs. Because a condo presents a riskier loan compared with a traditional house, some lenders may charge higher rates.
— Get preapproved. Apply for preapproval with your top lender choices to get an idea of how much you can afford and who will offer the best rates.
— Find your home. Work with a real estate agent to research, tour and choose the condo that you want. Having your preapproval letter in hand before starting this process can streamline putting in an offer.
— Submit your application. Once you’ve put in an offer, you can move on to the official application for your mortgage, which will involve the lender more thoroughly reviewing your financial situation and details of the property.
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How Does a Condo Mortgage Work? originally appeared on usnews.com
Update 11/02/23: This story was published at an earlier date and has been updated with new information.
