The Specialized World of Condo Mortgages
Today’s prospective home buyers have some compelling reasons to shop for condominiums instead of houses. Condos may come with less square footage, which makes them easier to clean and maintain — not to mention more affordable. Bankrate points out that condos’ proximity to major city amenities can also prove attractive to professionals who wish to live “close to everything.”
Unfortunately, a condo mortgage may come with its own special set of complexities. Here are some basic considerations to keep in mind when considering a condo purchase.
Pre-Qualification and Pre-Approval
One similarity between condo mortgages and home mortgages is the need for shoppers to get pre-qualified and pre-approved. Condo mortgages typically take the form of either conventional loans of FHA loans.
Investopedia notes that conventional lenders usually require a FICO score of 620 or higher. The minimum score for a 96.5 percent FHA loan is 580. In either type of loan, applicants may also need to demonstrate a favorable debt-to-income ratio.
Condo Association Qualifications
The condo mortgage approval dance doesn’t extend only to borrowers; the condo’s home owners’ association must also meet the lender’s requirements. Lenders may require the HOA to show that its members pay their dues on time, that it maintains sufficient insurance, and that it hold reasonable financial reserves.
FHA-approved loans may pose some particularly strict requirements. For instance, MortgageReports.com states that the FHA may require that at least 70 percent of units in a new construction have already been sold; if a condo association is involved, that association may need to confirm at least 50 percent occupancy.
Warrantable vs. Non-Warrantable Condos
Borrowers obtaining a condo through a conventional loan need to understand Fannie Mae or Freddie Mac’s notions of warrantability. A warrantable condo meets the specific requirements imposed by these organizations before they’ll buy the mortgage.
According to U.S. News & World Report, a warrantable condo must feature fully-completed construction, a majority of owner-occupied units, and on-time HOA payments by at least 75 percent of the occupants, among other requirements.
Borrowers seeking to purchase a non-warrantable condo may need to go through alternative mortgage financing options. Small to mid-sized lenders usually offer more flexibility in purchasing these types of mortgages than the biggest banks. But Mortgageloan.com warns that non-warrantable mortgages often impose higher interest rates, larger down payments, and less competitive overall pricing.
It Takes an Expert
The restrictions and requirements associated with condo mortgages call, not only for extra thought from the borrower, but also for a mortgage broker with specific experience in condos. Engaging such an expert can make all the difference between finding that dream residence and getting entangled in nightmarish obstacles.