Buying a condo is often trickier than buying a home. Condos are considered riskier than single family homes, resulting in tighter restrictions and higher interest rates. Along with the standard restrictions that any borrower must go through including the need for good credit, a low debt-to-income ratio and loan-to-value ratio is the need for the condo association to qualify under the FHA, Fannie Mae or Freddie Mac guidelines. If the association fails to meet the requirements set by these entities, you will be unable to secure a mortgage for the property.
The Condo Association
The need for the condo association to be approved is completely out of your control. This means that even if you qualify for a loan, you might get denied due to the state of the association. Before you jump headfirst into a contract on a condo, it is best to learn what you can about the association. There are several databases that are available to the general public that enable you to search for a condo association’s name to see if it is already on the approved list of Fannie Mae, Freddie Mac or the FHA. If you are unable to locate it, you will need to know the following information:
- What percentage of units are owner occupied in the building? If the answer is below 50 percent, the association will not get approved.
- Are there any owners that own multiple units in the building? If the answer is yes, then any one person cannot own more than 10 percent of the building.
- Are all association dues up-to-date? Chances are there will at least be a few that are late on their dues, but in total, there cannot be more than 15 percent of condo owners past due on their home owner’s association fees.
- Are there any lawsuits pending on the association? If there are, then no one will provide a loan for that building.
In addition to these answers, the lender will need to see proof of the associations insurance, a copy of their budget and verification of the reserves that they have on hand. Each of these factors is then evaluated to determine the level of risk that the association poses in order to determine your eligibility for a loan.
Higher Rates and Feeds when Buying a Condo
If you are in the market for a condo, you should be aware that you will likely pay higher fees and rates in order to get a loan. Condos are historically one of the riskiest loans available and with the latest housing crisis; many lenders are very reluctant to offer a loan for a condo. In order to make up for the level of risk, lenders charge interest rates that are an average of .75 percent higher than you would receive if you were purchasing a lower risk, single-family home. In addition, you will likely have to an origination fee, typically in the amount of around .75 percent of the loan amount, which is a one-time fee that is paid at closing.
Buying a condo is not impossible, but it is definitely more difficult. You should expect for the process to take longer than it would for a single family home and also be prepared for the association to not be approved. If you know the name of the association ahead of time, you can do your own research or ask your loan officer to do some evaluation for you to determine if it is worth wasting your time on a unit that might not be approved. On the other hand, if you know that the association is approved and you have good qualifications, it might be easy for you to get the condo that you want.