How Does a Condo Mortgage Work?

Buying a condominium is a home purchase, but condo financing isn’t entirely like mortgages for single-family homes. Getting 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.

Condo Financing: What Are the Options?

If you’re looking for a condo loan, your first question might be what kind of mortgage you can get.

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

— Conventional loans

— Jumbo loans

“Virtually all mortgages will work with condos,” says Brian Koss, executive vice president of Mortgage Network, an independent mortgage lender.

Similarities continue as you qualify for the loan, too. Koss says the general borrower requirements for buying a condo are typically the same as buying a single-family home. 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. During underwriting, lenders review not only your finances but also the financial health of the condo association for the property you want to buy.

The bank will consider factors from the condo association such as:

— Percentage of units that are rented vs. owner-occupied

— The amount of money held in reserve for maintenance

— The amount of space dedicated to nonresidential activity (e.g., on-site gym, laundry facilities, swimming pool)

Individual approval requirements vary, based on the type of mortgage you’re trying to get. Here’s a quick rundown of how each type of mortgage compares for condo buyers.

[Read: Best Mortgage Lenders.]

FHA Condo Rules

An FHA loan might be appealing if you’re looking for a loan as a first-time buyer with a low down payment requirement. FHA loans typically require only 3.5% down for qualified buyers.

The FHA offers an online tool you can use to search for approved condos. Generally, the FHA requires condos to meet these guidelines:

— At least 50% of the units must be owner-occupied.

— Only up to 50% of the units can be FHA-insured.

— Nonresidential space can’t exceed 35% of the condo project’s total floor area.

VA Condo Rules

The VA loan program is designed to help veterans and their families buy a home with no money down. Condos are included, but only if the property gets the stamp of approval from the VA.

Here’s a quick checklist of standards that condos must meet for a VA loan:

— At least 35% of the units must be owner-occupied.

— No more than 10% of the units can be 60 days late on homeowners association fees.

— The condo association must provide at least three years of financial records.

— At least 20% of the condo association’s budget must be set aside for maintenance.

The VA’s Veterans Information Portal includes a search tool where you can plug in the condo’s details to find out if it’s VA approved.

USDA Condo Rules

The USDA guaranteed loan program allows eligible buyers in qualified rural areas to purchase a home or condo with no down payment. Like with VA and FHA loans, the condo must be approved by the USDA.

You can plug the property details into the USDA’s search tool , but generally, if a condo is eligible under FHA or VA rules, then it would also be eligible for a USDA loan. Aside from that, a condo must be:

— Structurally sound

— Covered with flood insurance if it’s located in a flood plain

[Read: Best Mortgage Refinance Lenders.]

Conventional Financing for Condos

A conventional or conforming mortgage is one that meets underwriting guidelines established by Fannie Mae or Freddie Mac and isn’t guaranteed by any government agency.

Both Fannie Mae and Freddie Mac have similar eligibility guidelines for condo financing:

— No more than 15% of the units in the condo project can be 60 days or more late on HOA dues.

— Lenders are required to review the HOA budget; at least 10% of the condo budget must be held back for maintenance.

— At least 50% of the units must be owner-occupied as primary residences or second homes.

Freddie Mac and Fannie Mae loans have conforming limits that cap the amount you can borrow. For 2019, the maximum conforming loan limit in most areas is $484,350, but it climbs to $726,525 in high-cost areas.

Jumbo Condo Loans

A jumbo loan is a loan that exceeds the conforming loan limits for Fannie Mae and Freddie Mac. You can use a jumbo loan to get a condo mortgage. Requirements would be the same as for conventional loans. A jumbo loan might only be needed if you’re buying a luxury condo property or you’re in a high-value real estate market.

Qualifying for a Condo Mortgage

Again, qualifying for a condo mortgage hinges largely on two things: whether the condo meets the lender’s guidelines and your financial situation.

The minimum credit score and income you’ll need will vary by the type of mortgage. With an FHA loan, for example, the minimum credit score for a loan is 580. But with a VA, USDA or conventional loan, you may need a score of 620 or better to get approved.

The better your credit score, the better your interest rate is likely to be for condo loans. You’ll want to shop around with different lenders to get an idea of how condo mortgage rates compare. A condo presents a riskier loan to a lender compared with a traditional house. To compensate for that added risk, some lenders may charge higher rates for a condo loan.

The size of a down payment for a condo also will depend on the loan. Some programs, like Fannie Mae’s Conventional 97 program, require just a 3% down payment. Neither VA nor USDA loans require a down payment from buyers.

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 mortgages when your down payment is less than 20%. It can be eliminated eventually on most loans, but in the meantime, you’ll have a higher monthly payment.

[Read: How to Get a Mortgage With No Down Payment. ]

Do Your Research Before Getting a Condo Mortgage

If you’re interested in buying a condo, take time to learn more about your mortgage options first. It’s also helpful to do some due diligence on the finer points of condo living.

“When preparing for a purchase of a condo, most borrowers don’t understand some of the dynamics of dealing with an HOA,” says Jason Madiedo, president of Alterra Home Loans. “In addition to your principal, interest, insurance and possibly mortgage insurance, you need to keep in mind that there will be an HOA fee, which could fluctuate.”

Koss says buyers should also check the condo association’s budget to see how much is set aside for maintenance and repairs and how much of the project is owner-occupied. You may also want to check into whether there are any past or pending lawsuits against the condo developer or board that could affect your ability to buy.

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