If you are in the market to buy a home but don’t want the hassles of maintaining the exterior and don’t mind a community setting, owning a condo is a great option to achieve that goal. The process of buying a detached home is very similar to buying a condo with a few more steps involved to qualify for a mortgage.

Moreover, the community may offer a community gym, pool, a sport court, conference rooms, and other amenities that you may not have with a home in you price range.

When you are purchasing and financing a condo, another set of guidelines is added by most lenders which could make your interest rate higher than if you were buying a detached home. Not only does the borrower have to qualify but the condo association needs to qualify as well. Kitchen interior of high-rise condo

An experienced mortgage lender or mortgage originator who has closed numerous condo loans will know what to do along with guiding you to a successful closing.

One item you can expect the lender to examine is the financial soundness and communal areas of the condo development when you are under contract to purchase.

Makes Sure You Know The HOA Rules

In general, you’ll have rules or CC&R’s that mimic apartment buildings such as:
Pet policy
Trash disposal.
Vehicle types allowed in parking lots and garages.
Use of private balconies.
Interior modifications and structural changes.
Exterior alterations and seasonal arrangements.
Guest & visitor policy
Leasing of your unit to prospective tenants.
Hours you may make repairs.
Use of Common area and conduct.
Enforcement and penalties for rule violations.

If all of this acceptable, you will then continue with you qualifying for a mortgage.

Conforming Mortgage Guidelines for Condos

The majority of people buying a home or condo apply for a “conforming” mortgage. A conforming mortgage is a loan that meets Fannie Mae or Freddie Mac standards.  In many counties of California, like Los Angeles, Orange, and Ventura county the maximum conforming limit for 1-unit residence is $636,150.  So, with a 3-percent down program, your down payment is just $19,000 and change plus closing costs.

An additional limit of Fannie Mae and Freddie Mac is the rule of only financing condominiums that are considered “warrantable”.

For the most part, a condominium is regarded as warrantable if:

  • A minimum of 51% of the units are owner-occupied
  • Less than 15% of the units are delinquent with their association (HOA) dues
  • No single entity owns greater than 10% of the project’s units, including the builder
  • The homeowners association (HOA) is not in litigation
  • Commercial space represents 25 percent or less of the gross building square footage

On the other hand, condo projects that don’t meet one or all of Fannie and Freddie’s warrantable requirements are classified as non-warrantable.

The fact of the matter is non-warrantable condos are more difficult to obtain a mortgage. Rates tend to be higher by 1 to 2 percent of your standard warrantable condo mortgage rates.

Common non-warrantable properties include condotels, time shares, fractional ownership properties, and other projects.  When buying a condo, ask your real estate agent or lender about the building’s warrantability before you go any further.

Mortgage rates will be lower on a warrantable condo than a non-warrantable condo. The reason is the risk for default is lower on warrantable condos for the lender.

FHA and VA Mortgage Rules For Condos

Backed by the U.S. government are the forever popular FHA and VA mortgages. The Federal Housing Administration insures FHA loans while the Department of Veterans Affairs guarantees VA loans for eligible borrowers.

Both loan types are known more for their low down payments, 3.5-percent for FHA and zero down for VA, but they also offer borrowers more flexible lending guidelines than a conforming mortgage. However, both FHA & VA will only lend on approved condo communities.

You can find a list of approved developments from FHA and VA. If you don’t see the community on the list, both govt. sponsored enterprises have made it easier for condo associations to have their buildings approved.

The standard underwriting guidelines for an FHA condo loan to be approved include:

  • The borrower needs to qualify through FHA mortgage underwriting rules
  • A minimum of 50-percent of the project’s units have to be primary residences
  • A minimum of 70% of the units have to be sold in newly-built projects

For the most part, if a building is approved by Fannie Mae or Freddie Mac, the FHA and VA should also be permitted to finance units within the community.

A big benefit for FHA and VA borrowers is there are no add-on fees for the property being a condominium. Unlike Fannie and Freddie loans, the same mortgage rate will apply for a condo as it would for a single-family home.

Mortgages For Non-Warrantable Condos

There are less financing programs for non-warrantable condo but they are available.

In general, a non-warrantable condo has the following characteristics:

  • The construction of project is not completed
  • HOA is still under control by the developer and not the owners
  • A single person or entity is the owner of more than 10-percent of the total units
  • The majority of units are non-owner occupied or rentals
  • The community allows short-term rentals
  • The project is in litigation
  • The project has units under 400 sq. ft or it does not have a separate kitchen

To get a non-warrantable condo mortgage, you’ll need to talk with a specialty lender. Conforming, FHA or VA loans are not available for a non-warrantable condo.