The Special Rules for Condo Mortgages

Written by
Kirk Haverkamp
Read Time: 5 minutes

A condominium offers many of the advantages of homeownership with fewer of the hassles. That is, unless you're talking about getting a mortgage for one.

Mortgages for condominiums have special rules that don't apply to other types of home loans. Some of these involve the different fees that must be paid for a condo mortgage, while others raise the bar on qualifying for the mortgage itself.

Condominiums offer some very good deals right now. Home values on condos were particularly hard-hit during the downturn, with median prices falling by more than 40 percent from their pre-crash levels. While there has been some recovery since then, particularly in certain markets, the rebound in condominium prices in many parts of the country continues to lag that of single family homes.

That's both good and bad news for you if you're a condominium buyer. The good news is you're getting a lower price. The bad news is, lenders may be less likely to approve your mortgage in a market where condominium values are weak.

You see, when you buy a condo, you're not the only one who has to be approved for the mortgage. The condominium association has to be approved as well, and if the complex's finances are not in good shape, the lender is going to take a pass.

Association fees and charges

One of the key things to take into account when pricing a condo is the fact that you're going to be paying condominium association fees. These are the fees that go into a general fund to pay for maintenance of the grounds, upkeep of the external areas of the buildings and other shared expenses.

The association fees may or may not include the cost of homeowner's insurance for the building itself. If it does, the insurance will rarely cover the interior of the unit, meaning you'll need to purchase supplemental insurance for that. You may be able to pay association fees through an escrow billed as part of your mortgage statement, but in many cases condo owners simply write out a monthly check.

Either way, the lender will include your association fees as part of the mortgage payment when figuring your debt-to-income ratio when approving the loan. So if the lender will allow total mortgage debt of up to 28 percent of your monthly income, the association fees will be part of that, along with the mortgage payment itself, property taxes and any required homeowner's insurance not covered by the association fees.

When budgeted for a condominium purchase, keep in mind that your association fees can increase and probably will as the property ages and maintenance costs increase. You can also be required to pay for special assessments if major repairs or improvements are needed. The decision to raise association fees or impose special assessments is made by the condo association board, which is elected by unit owners in the complex.

Getting financing

When looking at a condo, the first thing you should ask is if the property is approved for FHA, Fannie Mae or Freddie Mac mortgages. If not, you may unable to get a mortgage for it and even if you can, the interest rates and down payment requirements will be much higher.

With an FHA mortgage, you can buy a condo with as little as 3.5 percent down, same as for a single-family home. With a condo, however, the FHA requires that no more than 10 percent of the units be owned by the same entity on a newly built project, meaning the developer must have found buyers for them.

For an existing properly, this limit was recently raised to 50 percent, reflecting the fact that many financially distressed properties have been bought up by investors in recent years.

The FHA also will not approve a mortgage if more than 15 percent of the unit owners in a development are past due on their association fees, though the allowable late period was recently raised to 60 days from 30.

Fannie Mae or Freddie Mac financing

For a condominium mortgage backed by Fannie Mae or Freddie Mac, you'll typically need a down payment of 5-10 percent of the purchase cost. You'll also incur an additional charge if you put down less than 25 percent, a charge that does not apply to single-family homes. This is either an up-front fee of 0.75 percent of the loan amount, or an additional 0.25 percent on your mortgage interest rate - your choice.

As with single-family mortgages, you'll also have to pay for private mortgage insurance (PMI) if you put down less than 20 percent on Fannie or Freddie mortgages. The FHA has its own mortgage insurance program for low-down payment loans.

You can avoid paying for mortgage insurance and get a lower down payment if you're willing to consider a condominium that was foreclosed on. Condominiums purchased through Fannie Mae's HomePath and Freddie Mac's HomeSteps programs for foreclosed properties can be had for as little as 3-5 percent down, no mortgage insurance and no property assesement, while many of the usual condominium requirements are waived.

Non-warrantable condominiums

Condominiums that are not eligible for FHA, Fannie Mae or Freddie Mac financing are called "non-warrantable" and can be very difficult to get financing for. This doesn't necessarily mean these are run down or bad places to live - many of them are high-end, brand new luxury units. But the lack of government-backed loan guarantees makes them costly.

Financing for non-warrantable mortgages is often arranged through a local bank or other financial institution the buyer has an established relationship with. Down payments may be as high as 50 percent of the purchase price and the loan will usually be in the form of an adjustable-rate mortgage (ARM), with a higher interest rate than you would pay for a conventional ARM.

A condominium can be a smart home choice for someone who values convenience and doesn't want to be bothered with mowing lawns or the other myriad tasks of conventional home ownership. Yes, there are more hoops to jump through in getting a mortgage, but lenders and real estate agents are well familiar with them and can help you with the process and answer your questions once you know what to expect.

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