Getting a mortgage on a condo is different than getting a mortgage on any other type of residential property: condos are harder.
Full disclosure: Before going into why condo loans are harder to get and what you can do to make it easier let me tell you about Home Loan Mine and affiliate disclosures. To keep the lights on at Home Loan Mine, we use affiliate links. Many, if not most, of the links on this site are affiliate links. If you register or buy anything through one of those links, I get a small commission. If I’m lucky, enough to keep the lights on and to have a bit left over to buy a porcupine.
It is harder to get a loan against a condo unit because condos are riskier. They are riskier because lenders don’t have to worry only about two entities only (borrower and property used as collateral); they have to worry about those + the common areas, the home owners’ association and the other unit owners.
And there’s nothing a different mortgage broker or lender’s loan officer can do to change that.
Getting A Mortgage on a Condo the Easy Way
Getting a mortgage on a condo is the same throughout the United States. Just to make this article a more fun, we’re going to say that Bob B. Bobster wants to buy a condo in Des Moines, Iowa. He looks for a mortgage broker in Iowa City and he looks for online lenders. No matter which one Bob chooses, his mortgage broker, to give him the best rate, will want to get him a conventional, conforming loan.
If that’s not possible, they will try to get Bob an FHA loan or a VA loan before trying any other kind of loan: they’re cheaper (i.e., they come with lower interest rates).
Conforming conventional loans are loans that Fannie Mae or Freddie Mac would purchase. FHA loans are loans that the FHA would insure.
The first thing to keep in mind is that it is a lot harder to get an FHA condo approval than a conventional, conforming one: the FHA will only insure condo mortgages if the unit is part of an approved project or if someone spot-approves the unit (takes time, effort, and can cost money too) and their approval project is harder and it costs money to remain approved, so few projects stay approved.
This is the link to check if a condo project is approved by the FHA: https://entp.hud.gov/idapp/
So, the first thing people who’re looking to buy or refinance a condo unit is to determine whether they qualify for a conforming conventional loan or not.
Or if the mortgage broker or lender they’re working with can do unwarrantable condos. (Unwarrantable condos is how the mortgage industry calls condo units that don’t fit the criteria of Fannie Mae, Freddie Mac or FHA.)
Unwarrantable condo mortgage loan programs have looser qualifying criteria but they still have qualifying criteria. Borrowers should make sure that their unwarrantable condo matches that criteria.
Most Common Traps Facing Borrowers Getting a Mortgage on Condo, in Des Moines, IA and Everywhere Else
Though the complete criteria takes up several pages, most condo projects that don’t comply with Fannie Mae, Freddie Mac and the FHA’s programs do so because they don’t meet one of the following 6 requirements:
1. The current and proposed budgets must call for an amount equal or higher than 10% of the association’s budget must be transferred into the reserves account. (If they do not, a reserve study is required, which takes time and money and willingness on the part of the association.)
2. No entity can own more than 1 unit in projects with 4 units or less; more than 2 units in projects with 5-20 units; more than 10% of the units in projects larger than 21 units.
3. No part of the association’s income can come from things that are not essential to running an association (i.e., they must be from regular or special assessments and maybe from cable fees; they can’t be from the association running a business or renting space).
4. No more than 25% of the project can be commercial in nature.
5. The developer must have turned over control to the association.
6. The association is involved in a litigation that’s not about foreclosure and there are monetary motivations at play.
There are many other restrictions, but they are rather rare. Still, people who are thinking about getting a mortgage on a condo should talk to a loan officer early in the process. Better said, the loan officer should be provided condo documents early in the process of buying or refinancing a condo.
What Borrower Bob Should Do To Get His Condo Mortgage The Easer Way
The documents that reveal whether the condo project meets or does not meet the requirements for conforming conventional or FHA loans are:
3. Condo Rules and Regulations
4. Articles of incorporation.
Borrower Bob (and anyone else) thinking about getting a mortgage on a condo should at the very least ask the person in charge of running the association questions that would reveal if the project meets the criteria listed above and get a copy of the budget and provide it, together with the answers from the person in charge of the association to their mortgage broker or bank.
And, as mentioned above, it makes no difference whether they are dealing with one mortgage broker or another.
Getting a mortgage loan on a condo is hardest if the loan is FHA-insured; getting a mortgage on a condo is harder than getting a mortgage on some other kind of residential property. But there are things borrowers can do to reduce the difficulty: get a copy of the budget and the Association’s contact information to their loan officer / mortgage broker early on.