As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
When purchasing a new home, you have many things to take into account, such as location, cost, risk, financing and more. If you decide to buy a condominium, you’ll need to know about the lender and investor limitations on financing a condo purchase. Keeping them in mind can help you avoid problems with your home loan financing.
We’ll be going over a list of important items to take into consideration in order to avoid problems getting your condo loan, but first, it’s important for you to know whether a condo is right for you.
Are You a Condo Person?
Owning a condominium is great for those who would rather pay homeowners association (HOA) fees to get certain amenities, such as a pool, a gym, and lawn care and other maintenance-related services that they’d rather not handle themselves. On the flip side, condominiums are also regulated by the HOA policies. Some have strict guidelines regarding what you can do to the exterior of the building, such as satellite dish placement or gardening.
Condo Financing Pitfalls
If, after researching your options, you decide that buying a condo is for you, make sure you’re aware of these 10 pitfalls in order to make the home loan process as smooth as possible.
Guidelines for mortgage investors like Fannie Mae, Freddie Mac, the FHA and VA require that the construction of your condo project be 100% complete. The project can’t be subject to additional work in phases. It may be helpful to confirm this with the builder and/or homeowners association.
In order to qualify for a conventional loan, you must be buying in a complex that is 90% sold out in order to get financing. There are also restrictions surrounding the number of condos in a given complex that can be owned by a single investor or entity.
If you’re buying an investment property, it’s important to note that at least 50% of the properties in the condo complex must be primary residences or second homes.
Homeowners Association Lending Rules
There are several rules surrounding homeowners associations that you need to know about as you start your mortgage process. To begin with, mortgage investors require that control of the association be transferred from the builder to the owners in the complex.
There are also some budget rules the association must abide by for potential residents to get a mortgage. Typically, an association is limited in terms of how much of its budget can be received from non-incidental business operations (like a restaurant, health club or spa). The exact limits may depend on the size of your down payment and the loan you’re getting.
They also must have enough money in the budget to cover the replacement and maintenance of things the entire community uses. Maybe the clubhouse roof needs to be reshingled or the community pool needs resurfacing. Condo associations have to set aside 10% of their funds for reserves.
Depending on the type of loan you’re applying for, mortgage investors may require that the association have fidelity insurance. Fidelity insurance covers the association in case someone is found to be embezzling or otherwise inappropriately using association funds.
Mortgage investors also limit how many homeowners within an association can be delinquent on their association dues. The reasoning for this is that it typically hurts the ability of the association to have enough money in their reserve fund if some people aren’t contributing as they should. The exact guidelines depend on the type of loan you’re applying for.
If you’re looking to rent out your condo, make sure this is something the association allows.
Finally, there’s the possibility that litigation against the association could affect your ability to get a loan. Typically, lawsuits that involve financial disputes are less concerning. But a lender might deny a loan if there are court actions dealing with the structural soundness or safety of the complex.
Your condo can’t have hotel amenities like a concierge or maid service. If this is the case, it’s considered a “condotel,” and you’re going to have a very hard time getting a loan because of investor guidelines.
FHA or VA Approval
If you’re getting an FHA or VA loan, the FHA and VA take much of the guesswork out of whether the condo complex can be approved. They handle it with an approval list. Therefore, if you’re getting a condo financed through either of these administrations, it’s important to make sure your complex is approved.
Both the FHA and VA maintain lists of currently approved condo projects. While your lender is ultimately responsible for approving your loan, the FHA and VA need to review construction plans and homeowners association documentation.
Construction guidelines are there for your safety. They also look at things like condo bylaws and balance sheets in order to make sure the homeowners association isn’t likely to fail. If it does fail, that can have a huge effect on your property value because one of the reasons you buy a condo in many cases is for the services and amenities provided.
If the condo complex you’re looking at isn’t yet approved, it may be possible to work for approval and get your complex on the list with the assistance of the homeowners association and your lender, but expect that the process could take longer.
If you’re interested in getting a condo, we can help. You can get a preapproval online through Rocket Mortgage® by Quicken Loans®. If you’d rather get started over the phone, you can give us a call at (800) 785-4788.
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