If you want to avoid a lot of disappointment and hassle when buying a condo, understand what your financing options are before you start shopping. Most mortgages must conform to guidelines set by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, or by the Federal Housing Administration (FHA). Only condominium projects approved by these entities can be financed through them. Here is what you need to know to finance a condominium today:
Fannie and Freddie Condo Mortgages
When buying a condo with a GSE-guaranteed loan, you won't be offered the best mortgage rates. In addition to employing strict guidelines on condominiums projects, Fannie and Freddie impose surcharges on condominium buyers. Since they are considered riskier loans, condo mortgages come with a .75% pricing adjustment unless you can afford to put 25% down on your purchase.
Fannie and Freddie won't finance just any condo project. You can find lists of approved condominium projects online, and if you buy in those projects, you know that you can finance them through Fannie or Freddie. However, there is a huge backlog of projects waiting for approval and very few are on the lists as of yet. In Nevada, for example, there are thousands of condominium projects -- yet Fannie Mae's approval list contains only 32! Individual units can be submitted for approval only if the project meets the following criteria:
- No more than 20% of the property's space can be used for commercial purposes. Popular mixed-use developments, with condos, restaurants and retail space will be harder to finance;
- No more than 15% of the units can be more than 30 days delinquent on their HOA dues;
- No more than 10% of the units can be owned by a single entity;
- If there are 20 or more units, the HOA must have fidelity insurance;
- For new development, 70% of the units must be pre-sold. Projects offering excessive seller concessions are deemed ineligible for financing;
- If you are buying your condo as an investment, at least 51% of the units must be owner-occupied. Otherwise, there is no owner-occupancy requirement;
- Unless the project's insurance covers your interior, you must obtain an H-06 hazard insurance policy for at least 20% of the unit's value as a condition of financing approval;
- The HOA must have capital reserves of at least 10% of its budgeted income.
FHA Condo Mortgages
FHA still allows you to put only 3.5% down on a condo, but you must buy in an FHA-approved project. FHA no longer allows "spot" approvals of individual units. Its guidelines are similar to those of Fannie Mae and Freddie Mac, except that there can be up to 25% commercial space in the project. New projects must meet the following additional criteria:
- At least 50% of the units must be pre-sold (as opposed to 70% for the GSEs).
- At least 50% of the units must be owner-occupied.
You can search online for FHA-approved projects by state, city, zip code or project name. A search of Nevada turned up 270 records -- a small percentage of the number of condominium projects in the state, but considerably larger than Fannie Mae's approved list.
Condos and Mortgage Insurance
If you plan to put less than 20% down and your project is not approved by FHA, you and your condo have to meet the guidelines of mortgage insurers. According to the guidelines of Genworth Financial, any of the following make a condo ineligible for mortgage insurance:
- Kiddie condo (meaning parents are financing a condo for their child);
- Mixed-use projects with more than 20% non-residential use;
- Tenant/investor ratio above 30%;
- Pending lawsuits;
- Physical and functional deficiencies that negatively impact marketability;
In addition, credit score requirements for those financing a condo can be as high as 740 just in order to get mortgage insurance.
Financing a condo may take longer than financing a single-family home, especially if you need to get a "spot" approval from Fannie Mae or Freddie Mac. That's important to keep in mind when you lock in your mortgage rate. When shopping for a condo, use a real estate agent who is familiar with all of these guidelines, so he or she doesn't waste your time on projects that you won't be able to finance.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.