How To Refinance A Condo
Condos can be a great investment for a person in the right situation, but there are some special requirements that go along with condo financing. Not only do you have to be approved for financing, but the condo project must be approved as well.
Applying and qualifying for a condo mortgage is similar to applying for a loan on a standalone house, but that doesn’t mean you’ll want to stick with your original loan over time.
If you’re looking to refinance your condo, it’s very possible to do something like lower your rate or tap into your home equity. The process will go much smoother if you know what to expect going in, though.
What’s The Difference Between A Traditional Refi And Refinancing A Condominium?
In many ways, doing a condo refinance is very similar to the refinance process for any other home. The lender will take a look at your income, assets and credit in order to determine your individual qualifications for financing. The condo is also appraised to help assign a property value just as a traditional single-family home would be.
The added piece with a condo is that the condo project itself must be approved. The reason for this is that the communal spaces and the services the association provides have a huge impact on the property value for individual condos. A big part of the allure of a condo is the additional amenities provided by the association. Those extra features can only be provided if the condo association is in good financial shape, so mortgage lenders and the investors they work with take a hard look at the condo association during the approval process.
Another thing to keep in mind is that condos are typically built in phases. A builder and/or condo developer will go to the authorities with a master plan that says they’ll have a certain number of buildings or units completed by a certain date before moving on to the next phase of construction. If the condo project is completely finished and established, the documentation required by lenders is different from the information needed for projects that are still under construction.
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What Condos Need Review?
It’s worth noting that not every condo is subject to condo review. If you’re getting a conventional loan on a detached or site condo, standard condo review rules don’t apply as they are treated like single-family residences. The same is true for condo projects that have no more than four units. Insurance for both of these property types will still be reviewed.
To get an FHA loan, a site condo doesn’t necessarily need to go through a full approval process, but there are certain requirements that need to be met including a review of fees for common areas. FHA-approved condos can either be an entire condominium community or a single unit as of 2019. Insurance and maintenance costs must be the responsibility of the owner. Site condos do require full VA approval in most instances.
What you can expect from the condo review process will depend heavily on whether the loan you’re getting is backed by the federal government or is a conventional loan through Fannie Mae or Freddie Mac.
Condo Review For Government-Backed Loans
Government-backed loans have the easiest review process to explain, so it’s a good place to start our discussion.
To be backed by the FHA, the condo project must generally be on the FHA condo project approval list. The exception would be the site condos mentioned above.
If you’re eligible for a VA loan and you’re looking to use your VA entitlement to get a condo, the project has to be on the VA condo approval list.
If a USDA loan is being refinanced, the lender will first check to see if the condo is on the FHA or VA condo approval lists. If that’s not the case, you may still be able to qualify for a USDA refinance based on a review under a Limited (Type A) or full (Type B) review for established condos. Though those reviews are typically associated with conventional loans, they can be used for USDA loans in a pinch.
Rocket Mortgage® is not offering USDA loans at this time.
What If My Condo Complex Isn’t On These Lists?
If you’re trying to get a government-backed loan through the FHA or VA, you’ll need the condo complex to be on the appropriate approval list. If they aren’t there yet, you have a couple of options. The easiest thing to do is apply for a conventional loan, but that may not be the best or even a possible option for some borrowers.
The other scenario to try would be to work with your lender and your condo association to try and get your condo approved through the FHA or VA. This isn’t a short process, but if you’re looking to refinance and one of these agencies provides the best possible option for you, it’s worth exploring.
If this is something you decide to pursue, speak with your Home Loan Expert. They can share more information on the process and help point you in the right direction.
Condo Review For Conventional Loans
If you’re getting a conventional loan, condo approvals work a little bit differently. The type of approval you get may depend not only on your qualifications as a borrower, but also whether construction is fully complete. Let’s briefly go over the construction piece so you can understand what the terms mean.
Established Condos Vs. New Construction Condos: How They Differ And How Their Refinance Reviews Work
When it comes to condos, it’s important to know whether you’re dealing with a new construction condo or an established condo project, because it affects the type of condo review that’s done.
If construction is complete in all phases, control of the homeowners association has been turned over to unit owners, and the appropriate percentage of units has been sold, the condo complex is considered established.
There are certain situations in which a condo complex can be considered established by Fannie Mae without needing 90% of the units to be sold, but things can get a little bit technical. A Home Loan Expert will work to find the best option you qualify for.
New construction condo reviews are more complex, and understanding what counts as new construction isn’t as simple as you might think.
A condo is considered new construction if it has any of the following characteristics:
- The condo project construction isn’t fully completed.
- The project still has more phases in its future.
- This site has recently been converted to a condo project from another use, such as an apartment building or warehouse.
- The builder/developer still controls the condo association.
- If the investor is Freddie Mac, a project is considered new construction until 75% of the units have been sold and closed. For Fannie Mae and jumbo loans, projects are considered new construction until 90% of the units are sold and closed.
Established Condo Projects
Let’s start the review of conventional loan condo approvals with already established condo projects. Although there are exceptions, most standard condo approvals will break down into either a limited or full review.
If you’re looking to qualify for any type of refinance on your condo, a limited review can be very desirable because it requires less documentation. In order to qualify, clients in most states need to be aware of a couple of requirements:
- For a primary residence, you need to have at least 10% equity left in your condo after the refinance.
- For second homes or investment properties, you need to leave at least 25% of the value in your condo after the refi.
Florida has some different requirements in terms of equity to qualify for a limited review:
- For primary residences, the remaining equity requirement is 25%.
- If it’s a second home or investment property, you’ll need to leave 30% equity in the home.
Depending on the investor in your mortgage, you may be required to have a full condo project review regardless of the amount of equity left in your home after the refinance. Your Home Loan Expert can get you into the best possible loan option for your situation.
In a limited review, a lender will look at the following:
- Insurance coverage: The condo association has to at least have enough insurance to cover common areas, amenities and equipment shared by each owner in the condo association. The association may also insure the full value of each individual unit itself, but if they don’t, the unit owner will be responsible for a walls-in policy covering the interior of the unit. The review may also include hazard insurance, such as flood and wind coverage, as applicable.
- HOA requirements: Unit owners have to be in control of the HOA.
- Control of units: There are limits to how many units can be under the control of a single entity. If the project has between 5 – 20 units, the limit is two units. If there are more units than that, the limit is between 20 – 25% of the project depending on the mortgage investor in your project. There are circumstances in which units may be counted differently, so be sure to talk to your Home Loan Expert to find out.
- Legal issues surrounding the condo association: Any pending litigation in which the condo association is a defendant will be reviewed.
If you have less than the required amount of equity to get a limited review for your property type or limited review isn’t offered for the particular loan you’re working toward, you can still proceed with a full review.
In a full review, the condo complex has to turn over everything they would need to in the limited review, plus the following:
- In addition to having a master insurance policy that covers common areas and equipment available to all unit owners as before, the insurance must include at least $1 million in liability coverage per occurrence.
- If the condo project has over 20 units, there must be fidelity bond coverage in place to cover the association in the event of mismanagement of HOA funds.
- The budget of the association is reviewed. This helps determine the financial health of the association and make sure it’s meeting minimum reserve requirements. There are also restrictions on how much of the association’s income can come from sources outside of typical business operations for an HOA, like a restaurant or spa. Your Home Loan Expert can provide specifics.
- A standard condo questionnaire must be completed.
If you happen to be refinancing an investment property, at least 50% of the units within the project must be owner-occupied.
New Construction Condos
If you’re refinancing a condo in a complex that’s not finished or otherwise doesn’t meet guidelines for an established condo, there are different review policies in place. These policies may vary depending on the investor in your loan, but this will give you the basics of what you need to know to qualify.
The first basic requirement to keep in mind is that in order to qualify for a new construction condo under certain programs , you need to have at least a median FICO® Score of 700 or higher. If you have a co-borrower, lenders take a look at the lowest median credit score of all borrowers on the loan. If you’re looking for a jumbo loan, those guidelines apply, so your score may need to be slightly higher to refinance certain properties.
New Construction Condo Review Basics
New construction condos have certain basic review guidelines that need to be met. One of the big ones is around budget review – 10% of the association budget has to be allocated toward replacement reserves. If any guidelines of the budget review fail, a more thorough reserve study is undertaken.
There are several exclusions to what is included in this calculation. For example, cable TV and internet access income may be collected, but it’s not included for the purposes of determining required reserves. The same is true for monthly utilities and income from special assessments outside of the regular dues. The best way to remember this is that income is only included in the budget review if it’s for ongoing operations of the association, maintenance or capital improvements.
No more than 15% of members within the HOA can be delinquent on dues by 60 or more days.
Standard condo litigation and insurance reviews apply. Like established condos under full review, there must be $1 million in liability coverage as well as fidelity coverage.
The Newest Of Condos
There are a couple of different mortgage options out there that allow you to qualify for conventional loan financing, but this Rocket Mortgage exclusive option has a couple of key benefits.
- The number of owner-occupied units that must be presold or under contract for sale is 25%, which represents a significantly lower hurdle than other conventional new construction guidelines.
- Our program 1 only requires that construction on the building in which the subject unit is being refinanced be complete as opposed to the entire phase of construction.
Unlike other nonconventional options offered in this situation by other lenders, affording a full range of conventional financing options, meaning clients won’t have to pay a higher rate just to get into a new construction condo. Both fixed and adjustable-rate mortgages (ARMs) are available, and you can get a 30-year fixed-rate mortgage with as little as 3% down.
A 700 median FICO® credit score is required. If you’re looking to qualify for a jumbo loan with different credit score requirements, those requirements apply. This option isn’t available in Florida at this time.
Other than the presale and construction requirements, all other standard guidelines regarding factors like budget and insurance review still apply.
There are other types of condo reviews that different mortgage investors use to qualify you for conventional financing. Your Home Loan Expert will find the right option for you.
What Will You Need From Your Condo Association To Refinance?
Your condo association will have to provide various documents related to the review items above. The good news is that the people running the association should have access to these documents and be able to tell you how to get them or provide your lender with a copy directly.
Here are some of the documents you or the association may be asked to provide:
- The covenants, conditions and restrictions associated with the project. This may also be referred to as the project master deed, bylaws, or recorded declaration. The lender will be able to tell you what they need based on your state.
- Budget for the condo association
- Condo questionnaire
This is not meant to be an exhaustive list, and other documentation may be required.
If your association needs FHA or VA approval, talk to your lender about how to get that process rolling.
View Your Refinancing Options
What Paperwork Will You Need For Your Condo Refinance?
To qualify for a condo refinance, you’ll need to submit personal financial information alongside the documents from your condo association.
In terms of documentation, your lender will use a fairly short list of documents in order to determine what you might qualify for. Rocket Mortgage recommends having the following ready:
- Your last two pay stubs
- Past 2 years’ worth of W-2s
- Bank statements for the last 2 months
- Your last 2 years of tax returns
Your lender will be able to fill you in on any special documentation needed for specific loan options. For example, those looking to use a VA loan will need a Certificate of Eligibility (COE).
What You Need To Qualify To Refinance A Condo
As with any mortgage, your lender will look at four factors in order to qualify you for your condo. These include your income, property, assets and credit, which you can remember by the acronym “IPAC.”
Your income is one of the biggest factors in determining how much you’ll be able to afford. One of the things lenders do is calculate something called your debt-to-income ratio (DTI).
Put simply, DTI is a ratio of your existing monthly installment and revolving debts compared to your monthly income. As an example, let’s say you gross $5,000 per month. You have a car payment of $300, a student loan payment of $400, a $1,200 mortgage payment and credit card balances totaling $300. That puts your DTI at 44% ($2,200 / $5,000). In order to qualify for the most possible mortgage options, you’ll want to keep your DTI at or below 45%.
Your credit is another factor that’s incredibly important. There are minimum credit scores typically associated with each lending option. Lenders look at the lowest median score of all borrowers on a loan. All scores listed in this section represent the lowest median score necessary between Equifax, Experian and TransUnion.
For a conventional loan, the minimum credit score is 620. If you’re trying to get a conventional loan for new construction, it could require a FICO® of 700. Your DTI can go up to a maximum of 50%.
The minimum FICO® Score for FHA loans on a rate-term refinance is 580. Something to note is that if you’re trying to qualify with a credit score at that level, you’ll have to keep your DTI fairly low. It has to be no higher than 38% before your house payment, and 45% once the house payment is added in.
It’s worth noting that with a credit score of 620 or higher, you can potentially qualify with a higher DTI than you can on many other loans, so that’s something to be aware of. You also need at least a 620 to take cash out with an FHA loan.
You can do a rate-term refinance on a USDA loan with a credit score of 640 or higher. Your maximum DTI on this would be 50%. However, Rocket Mortgage is no longer issuing USDA loans.
At this time, the USDA doesn’t allow cash-out refinances, but you may still be able to secure a lower interest rate or better loan term to help lower your monthly payments.
If you’re an eligible active-duty servicemember, reservist, veteran or qualifying surviving spouse, you may qualify for a VA loan. The VA has no minimum credit requirement, but lenders can set their own guidelines. With Rocket Mortgage® you'll need a credit score of 580 or higher for a rate-term refi.
If you’re looking to do a cash-out refinance, you can convert all of your equity into cash with a minimum score of 620. If your score is between 580 – 619, you have to leave at least 10% equity in the home after the transaction. This limitation also applies if you have an ARM.
In terms of DTI, you can go up to 60% on a fixed loan and 50% with an ARM. The ability to qualify with higher payment amounts could help you take more cash out if you wanted to. However, you should always consider your finances very carefully. If you have any doubts, please talk to a financial advisor.
Lenders will take a look at any savings and other accounts you’re using to qualify. The idea here is to make sure not only that you have enough for closing costs, but also that you have reserves.
Reserves are funds you would use to make your mortgage payment if you lost your job or had another event that put a strain on your income. These are measured in months of mortgage payments including principal, interest, property taxes, homeowners insurance and condo association dues, collectively referred to as PITIA.
Every mortgage option is different, but a good starting point is 2 months’ worth of reserves. You may need more to refinance a second home or investment property.
The final piece of the puzzle to discuss is property type. This is particularly important when we talk about something called loan-to-value ratio (LTV). You can think of LTV as the inverse of your existing equity amount. For example, if you have 10% equity in your home after a refinance, the LTV on the loan would be 90%.
Lenders use the LTV ratio as a risk metric. The required maximum LTV may depend on factors such as the purpose of the loan (cash-out or rate-term), the investor in the mortgage, the person’s credit score and the property type (i.e., primary, vacation or rental).
Before getting into specific equity amounts needed, another big piece of the property portion of this is the appraisal. Since this is a refinance, you may be familiar with the process, but read on for a refresher.
The function of an appraisal is twofold. To begin with, the appraiser has to assess the livability of the property. Could someone safely live there and be able to get full enjoyment out of it? Some of these requirements are obviously basic, but just for example, here are a few:
- The utilities should work.
- There shouldn’t be exposed studs.
- There should be hand or guard rails on porches and decks.
The FHA places special emphasis on making sure there’s no chipped or peeling paint in homes built before January 1, 1979, because lead-based paint was commonly used at the time.
Those are the basics, but feel free to check out more information on appraisal requirements.
The other job of the appraiser is to actually give the property a value. The condo is serving as collateral for your mortgage, so a lender can’t give you more money than the property is worth. This can be really important in a refinance because the property value is a primary determinant in how much equity you can access.
For a conventional loan on a one-unit primary property, you can do a rate-term refinance with as little as 3% equity. If you’re looking to take cash out on a primary property, you need 15% equity to do so on a single unit. The amount of equity necessary will be higher if you happen to be refinancing multiple units.
For a second home, you can do a rate-term refi with as little as 10% equity. For a cash-out refi it would be 25%. Meanwhile, on an investment property, you can do a rate-term refi on a single unit with an LTV as high as 85% (15% equity) and take cash out with as little as 25% equity.
Once you get past conventional loans, things get less complicated because the others only have lending for primary properties. Jumbo loans have their own requirements, and may be the right fit for certain qualified borrowers. Please talk to your Home Loan Expert about your options.
A USDA loan is the easiest option to explain because you can refinance up to the full value of your property. At this time, only rate-term refinances of one-unit condos are available.
For FHA loans, you can do a rate-term refinance with as little as 3.5% equity left in the home. You can also take cash out as long as you leave 15% equity in the home and have a 620 credit score.
Finally, you can refinance the full value of your VA-backed property in order to do a rate-term refinance. As mentioned earlier, if you have a 620 credit score, you can also convert your full home value into cash with a VA loan. Otherwise, you have to leave 10% equity in the home when you take cash out.
The Bottom Line: Refinancing Your Condo Mortgage Can Be A Great Idea
Refinancing a condo is a great way to help you free up cash or save money over the life of the loan. Think about the type of loan that will work best for your needs and gather the necessary documentation as early on in the process as you can. This will help you speed up the refinance process and get you one step closer to saving money.
Ready to get started with your condo refinance or want to see what types of condo mortgage rates you’ll qualify for? Apply online with Rocket Mortgage. You can also give us a call at (833) 326-6018.
1 The New Construction Condo program is available on eligible refinance or purchase conventional and jumbo loans on primary, secondary and investment properties. Must have a minimum of 25% for conventional and 50% for jumbo of presold units by builder of legal phase (development of a single property divided into separate units), any prior phases and must pass additional condo project review requirements. The subject building that the unit is in must be complete as evidence by a certificate of occupancy. Must meet minimum FICO and loan-to-value ratio (LTV) requirements. Not available in Florida. This is not a commitment to lend. Additional restrictions and conditions may apply. Not all condo projects are included. Please contact a Home Loan Expert for additional information.
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