Condos are looked at differently than single-family housing. With a single-family house, the rules for financing are primarily concerned with how good the property condition is and whether the house could be sold on the open market.
Condos go a little further than that in terms of requirements. There are regulations for the condo complex itself as well as the unit you’re trying to get financing for. Before we get into what’s changed, let’s talk about some general issues that come up in getting a mortgage for a condo.
Get to Know the Homeowner’s Association
When you buy a condo, not only do you have to worry about getting your personal information together for the loan, but you also need to get some information from the condo complex as well.
In a condo arrangement, you own your dwelling and the condo association owns the land and the communal spaces. Because the communal spaces are an important part of your ownership in a condo, the investor has to know certain things. For example, there may be requirements as to how many units in the condo complex have to be occupied when you apply for financing. There are limits to how many units can be owned by a single entity. There are also common restrictions on the number of people who can be behind on their homeowner’s association dues.
The Review Process
The review process that potential condo buyers must submit to is designed to make sure the condo project and the homeowners association are in good shape from a financial standpoint.
There are two types of reviews: limited and full. The difference between these two types of reviews is how thorough they are. Which type of review you have is dependent on your property type and down payment. After going over that, we’ll explain a little bit about each type of review.
Limited or Full?
A limited review requires somewhat less documentation from your homeowners association than a full review. Which one you have to deal with depends on your down payment and whether this is your primary home, a second home or an investment property.
Fannie Mae recently changed its condo policy on primary homes to be in line with Freddie Mac. Both agencies require a 10% down payment for a limited review. Second homes require a 25% down payment, while investment homes are always full reviews.
What’s the Difference?
Financing a condo always requires certain information from the homeowners association.
In a limited review, clients must submit information on any commercial space and ownership distribution. You also have to turn in information from the condo complex on any pending legal action taking place. The condo project may be required to have certain types of insurance coverage. There are limits on how much income a homeowners association can earn from nonbusiness operations.
In a full review, there are a few additional things you need to get from the condo operations people. These include certification from the person managing the condo project that it has been approved, a condo questionnaire and a copy of the budget for review. There are more details, but this covers the basics.
It’s Getting (Slightly) Easier
As you can see, you have to do a little more legwork to buy a condo. Believe it or not though, things have gotten easier as Fannie Mae has changed several of its policies related to condo finance recently. I’ve included a listing of those changes below:
- You can get a limited review with a down payment of 10% whether your loan is backed by Fannie Mae or Freddie Mac.
- The amount of space within the project that can be used for commercial space increased.
- The number of units that may be owned by a single individual or investor has increased.
- The requirement that projects carry fidelity insurance has been removed on some loans.
- More units within a project can be rentals.
With these changes, it should be easier to obtain a mortgage for a condo. However, there’s some extra documentation you have to get about the condo project no matter what.
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