What to Know About Financing a Condo
If you’re in the market for a condo, there are a lot of perks. For example, if you’re looking for somewhere that’s touristy, like Daytona Beach Shores condos for sale, then it could be an investment property. Condos make excellent short-term rentals, especially when they’re close to the water and in resort communities. Condos are low maintenance, you don’t have to worry about the upkeep of a yard, and they tend to have amenities that are managed for you as well. Condos are different from a stand-alone homes because you have shared walls and common areas. Unlike an apartment, condos are owned within the larger building. Apartments are rented units in shared buildings.
While condos are an attractive style of home to buy, especially as an investment or second home that you want to worry about minimal maintenance with, they also come with challenges. One such challenge is getting a loan. That’s not to say you can’t. People finance condos and get a mortgage on them every day, but there are unique considerations to do so, which are detailed below.
What’s a Condo?
A condo, as touched on above, stands for condominium. This style of home is one that’s typically lower maintenance and more affordable than a single-family home. They’re located within a community that contains other units, and while they’re privately owned, the owners share the common areas. If you own a condo, you’re typically responsible for interior care and maintenance, and a property management company does everything else.
How Condo Financing Works
The process to finance a condo is generally the same as doing so for a single-family home, with a few distinctions. The same types of loans that are available to a single-family buyer are usually available to condo buyers. These loans include conventional loans, as well as FHA, VA, and USDA loans. The difference when financing a condo is that you may have to go through some extra steps and paperwork. The interest rate may be a little higher too. The rates to finance a condo are usually anywhere between 0.125% and 0.25% higher than if you were getting a mortgage on a single-family home. The reason that the interest rates are higher is because of the assessments and restrictions that are put in place by the condo association or homeowners association that are out of the control of the borrower. This creates more risk for a lender.
During underwriting, lenders also have to get more documentation from the condo association or maybe the HOA or management company. These documents can include information about the condo project and also information on how many units are owner-occupied versus occupied by tenants and how many are owned by a single tenant. They’ll need a copy of the master insurance policy for the condo association. The thing that’s different overall is that the lender isn’t just approving you as the individual buyer. They’re approving the condo project too. The condo project has to meet the standards of the lender and be thoroughly vetted.
For example, according to current guidelines from lenders, no more than 15% of the unit owners can be behind on their dues to the condo association. One investor can’t own more than 10% of the units, and the condo has to maintain insurance coverage standards. The condo community can’t be part of any litigation that could result in a financial loss to the association. Additionally, according to lending guidelines, condo buildings with more than 35% of the square footage going to commercial space don’t qualify. This is because a lender can see having a big portion of the income coming from one or commercial tenants as being especially risky. A full review can be required in some cases, involving additional paperwork, like budget reports or a Covenants, Conditions, and Restrictions document.
Loan Requirements
In addition to what’s talked about above, you have to meet the requirements for the type of loan you want to get. For example, for a conventional loan, you need a minimum of 3-5% down, a 620 credit score, and a debt-to-income ratio of no more than 36%. The condo unit will also have to be your primary residence. For an FHA loan, you’ll need to go through the HUD website, and it’ll list the approved options. You’ll need at least a 3.5% down payment and a 580 or higher credit score. Your DTI ratio can’t be more than 50%, the condo has to be your primary residence, and you must meet the property requirements that the FHA sets for all their loans. Every project, according to the FHA, has to be reviewed and approved by either HUD or a delegated institution. For a VA loan, no down payment or minimum credit score is required, but you have to be either a member of the military or a veteran or an eligible surviving spouse. There’s no max DTI ratio, but if your ratio is more than 41%, you have to have other compensation factors like a higher credit score. The condo has to be your primary residence.
Buying a Condo
If you want to get approved for a mortgage for a condo, you need to carefully research the properties. It’s a lot more intensive to research condo communities because you need to ensure the association is financially strong and that it’s well-run. You also have to choose a community that includes owner-occupants primarily. You can explore the different loan options ahead of time to make sure that the project will be approved.
Finally, you can likely expect that your closing timetable may be longer and your closing cost may be more. You, as a borrower, will likely have to pay for the documents you need from the agent managing the condo, like the insurance binder and the condo financial statements. That can be a few hundred dollars that you have to pay when it’s time to close. Since there are more people involved in the loan process, including the insurance company and the condo association, it can take 30 days or more to close.
