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Your Guide to Financing Condos

[Updated: Nov 13, 2020] Oct 16, 2019 by Matt Frankel, CFP
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In many ways, financing a condo is the same as financing any other residential property. The same lenders that make loans on other residential properties typically finance condos as well. Things like down payment requirements and other qualification standards are largely the same.

However, there are a few key differences you should know before you start shopping. Here's a guide to financing a condo that should be useful whether you plan to buy a condo as an investment or as a full-time residence.

Types of residential mortgages

First, it's worth discussing the three types of mortgages that you could get for a condo. These three types apply to all residential real estate financing:

  • Primary residence: Also referred to as a principal residence, this is a home that you intend to live in. Generally speaking, your primary residence must be close to your place of employment and cannot be rented out at all. And you can only have one primary residence at a time. This is generally the easiest to finance, and also tends to come with the lowest down payment requirements.
  • Second home: A second home is a residential property you intend to live in some of the time and that you own in addition to a primary residence. Vacation homes typically fall into this category. You can rent out a second home, but there are restrictions that depend on the lender when it comes to rental rules and owner occupancy requirements.
  • Investment property: An investment property is one you don't intend to use for personal purposes at all. It's purely a rental property. This is the toughest type of mortgage to qualify for, and it tends to have the highest down payment requirements.

Qualification requirements for you are the same

Before we go into the specifics of condo financing, one key point is that there are two ways you'll need to qualify for a mortgage on a condo:

  1. The bank will need to determine whether you're qualified for the loan.
  2. They'll also need to decide whether the condominium where you want to buy a unit is qualified.

We'll get into the condo qualification concerns in the next section. The good news is that lenders generally require the same personal qualifications for a mortgage on a condo as they do for a single-family home loan.In other words, if your loan product requires a 10% down payment, that generally applies to a condo, as well. If your lender requires a debt-to-income (DTI) ratio of 36% or less for a single-family mortgage, the same will typically apply to a condo. In a nutshell, there's nothing special required from you to finance a condo.

Condo-specific concerns

Although there are no special requirements for you to qualify for a mortgage on a condo, there may be special requirements related to the condo itself. Here's a rundown of things a lender could look at when you apply for a mortgage on a condo:

  • The condo association will likely receive some scrutiny. For starters, the lender will want to see that the association is in good financial condition, has adequate insurance, few owners are delinquent on their association dues, and that there are no pending legal issues against the HOA.
  • To qualify for financing, a condominium generally will need to be entirely residential in nature. For example, if a portion of the building is occupied by hotel rooms or commercial space, it could be a dealbreaker for a lender.
  • If any of the condos in the building were sold as timeshare units, you could have an issue obtaining financing.
  • Lenders typically want to see that a certain percentage of the units are owner-occupied and aren't owned as rental properties. For the purposes of occupancy requirements, condos owned as vacation homes are generally considered to be owner-occupied.
  • Lenders use comparable sales to determine how much a property is worth. With condos, they may want to see comps from the same building. If no units have recently sold, this could be a roadblock for financing.

FHA condo loan financing requirements

If you're applying for FHA financing for a condo, there are some specific requirements you should know about.

  • The condo has to be your primary residence.
  • The biggest potential roadblock is that the condo must be listed on the FHA-approved condominium list. This is a list of condos in the U.S. that meet HUD standards. If the condo isn't on the list, it doesn't qualify for FHA financing -- period.
  • More than half of the units in the condominium have to be owner-occupied, and at least 80% of all units with FHA financing must be owner-occupied. To get an FHA mortgage, a home must be your primary residence, but you can convert it into a rental after a certain number of years.
  • The condo complex must have been complete for at least a year. In other words, you can't get an FHA loan on a condo in a building that's under construction or that has been recently completed. This rule applies even if the building your unit is several years old but a new phase is being added.

It's also worth noting that if you qualify for a VA mortgage, the requirements are similar to the FHA's condo rules. For condos built after Dec. 9, 2009, the VA maintains its own list of approved condos.

Conventional financing requirements for condos

If you're applying for a conventional (non-FHA) mortgage on a condo, the requirements vary based on your lender, the size of your down payment, and more. The condo concerns I discussed a couple of sections ago generally apply to conventional financing, but some of the FHA rules don't. For example, you can use a conventional mortgage to buy a condo that's still under construction or was recently completed. And if you want to buy a condo as a vacation home or investment property, a conventional loan is the way to go. As I mentioned, the exact requirements can vary. Even so, I'd suggest planning on the lender wanting:

  • at least 50% owner-occupancy in the complex,
  • at least 90% of the units to be occupied (no bank wants to finance a condo in a half-empty community), and
  • no more than 15% delinquency in condo association dues.

Lenders want to know that the association dues aren't likely to skyrocket due to non-payment by other owners or financial insolvency. They also want to know that the building is going to be well taken care of. After all, if you can't make your loan payments, the condo will become the bank's problem. Lenders want to protect themselves.

The bottom line

The main difference between financing for condos and single-family homes is that there are two things that need to qualify for financing -- you and the condo building itself. The qualification standards for you are generally the same, no matter what type of home you're buying. You'll still need an adequate down payment, enough income to justify the loan, and stable employment, for example. However, you can expect the condo and its association to be put through a rigorous approval process. That process could prevent you from getting financing, even if you're an otherwise well-qualified applicant.

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