A condo loan is just like a conventional mortgage in the sense that a lender funds the purchase of your condo property. In exchange, you agree to repay the debt with interest. However, there are special rules that are attached to condo loans. These restrictions hover between the rules used for FHA loans and conventional loans. Furthermore, each lender may have its own set of additional rules before agreeing to the loan.
Of course, you will need good credit and sufficient income to qualify for a condo loan, as you would with a conventional mortgage to purchase a house. However, because condos are part of a larger network, lenders want to make sure that the entire building is also financially secure. As a result, condo loans are held to strict rules for approval.
Whether or not the condo loan qualifies for FHA or traditional financing, most lenders have a set of basic guidelines that the condominium building must adhere to.
Each condo has its own set of homeowner association fees. In general, at least 85% of these HOA fees must be paid on time by the current owners. The other 15% includes all occupied, investor, bank-owned, and vacant units. Properties with significant outstanding homeowner association dues are usually frowned upon.
Lenders do not want to see pending legislation in a condo complex. Any outstanding lawsuits will complicate the purchase.
The condo must have sufficient insurances, such as hazard, liability, and flood insurance. Lenders want to see that their investment in being protected in case of an accident.
Besides the borrower’s creditworthiness and income, the condo association must adhere to government guidelines in order for your loan to be approved. These guidelines are set forth by the FHA (Federal Housing Administration), Fannie Mae, and Freddie Mac.
HUD requires that the property is listed on FHA’s approved condominium list. You can find this list on the HUD (U.S. Department of Housing and Urban Development) website.
At least 80% of all FHA loans in the condominium must be for owner-occupied units. In other words, FHA prefers their borrowers to make the property your principal home, not an investment property.
On the same note, a minimum of 51% of all units in the complex must be owner-occupied.
The construction of the building must have been completed for at least a year, with no pending additions or construction phases. Taking out a loan for a property that is not yet built or still in the process is a riskier investment than something already built.
If your loan doesn’t qualify for Fannie Mae or Freddie Mac, it is considered a “non-warrantable condominium.” Another option is to get a portfolio loan by a lender who is willing to keep the loan instead of selling it to Fannie Mae or Freddie Mac. The loan terms of a portfolio loan are comparable to conventional loans.