How Does a Condo Mortgage Work?

Securing financing for a condominium home differs from purchasing a single-family home in several ways. Firstly, condo mortgages typically entail higher interest rates. Additionally, qualifying for a condo mortgage can be more challenging due to additional underwriting requirements.

A condominium, often referred to as a “condo,” presents a more budget-friendly and less upkeep-intensive option compared to a single-family home. Situated within complexes alongside other units, condos are privately owned residences with shared common areas. One of the main attractions of condo living is that owners typically only need to maintain the interior of their unit, leaving the management of communal spaces to a property management company.

Apartments are commonly leased by tenants for specific durations, whereas condo units are owned by residents. Moreover, condo owners are responsible for property taxes, while landlords handle property taxes for apartment buildings.

In many instances, condo buildings are overseen by a homeowners association (HOA), tasked with maintenance, amenities, and shared areas like lobbies, landscaping, and elevators. As tenants do not own their apartment units, they are not members of an HOA.

Another significant distinction between condos and apartments lies in financing. Apartment occupants pay monthly rent to their landlords without accruing equity. Conversely, condo owners typically secure their purchase with a mortgage, gradually building equity over time through mortgage payments.

Securing financing for a condominium closely mirrors the process for financing a single-family home. You’ll need to accumulate funds for a down payment and navigate through the loan application procedure. Essentially, the same array of loans accessible to single-family home purchasers are also accessible to condo buyers, encompassing conventional loans, FHA loans, VA loans, and USDA loans (although these markets typically offer less condominium housing stock).

However, although the loan options remain consistent, the process of obtaining the loan diverges when purchasing a condominium.

Condo mortgages come with a few notable distinctions compared to other mortgage types:

  • Higher Interest Rates: Loans for condos often carry slightly higher interest rates, typically ranging from 0.125 percent to 0.25 percent more than rates for other properties. This is because factors like restrictions or assessments imposed by the condo association introduce additional risk for lenders.
  • Additional Documentation: Lenders require extra documentation from the condo association, HOA, or management company. This may include a questionnaire about the condo project, details on owner-occupied versus tenant-occupied units, and information on units owned by a single entity. Additionally, the lender may request a copy of the condo association’s master insurance policy to assess risk.
  • Vetting of the Condo Project: The condo project itself must meet lender standards, such as limitations on the percentage of unit owners behind on condo dues or the proportion of units owned by a single investor. Lenders also scrutinize the amount of commercial space within the building, as a high ratio can pose risks.
  • Insurance Requirements: Condos must meet insurance coverage standards and should not be involved in litigation that could lead to financial loss for the condo association.

In some instances, a comprehensive review may be necessary, involving additional paperwork from the HOA or management company, such as budget reports and a Covenants, Conditions, and Restrictions (CC&R) document.

To enhance your likelihood of securing approval for condo financing and successfully purchasing a condo, consider the following suggestions:

  • Thoroughly Research Condo Properties: Prioritize condominiums located within well-managed, financially stable associations predominantly occupied by owners. Ensuring the condo association’s health and management can positively influence your financing prospects, advises Loyd.
  • Explore Various Financing Options: Familiarize yourself with different loan types and financing alternatives. Understanding whether your chosen loan necessitates prior approval, such as by the FHA or VA, can streamline the process and boost your chances of success, recommends Phillips.
  • Save Up for a Substantial Down Payment: Accumulating a sizable down payment for your condo purchase can mitigate risk perception among lenders, potentially leading to improved interest rates and increased approval likelihood.
  • Prepare for Increased Closing Costs and Duration: Anticipate higher closing costs associated with obtaining necessary documents from the condo management, including the condo questionnaire, financial statements, and insurance binder. These additional expenses, typically amounting to a few hundred dollars, should be factored into your budget. Moreover, due to the involvement of multiple parties such as the condo association and its insurance company, expect extended closing times, often exceeding 30 days, cautions Loyd.

To secure financing, you need to satisfy particular eligibility criteria tailored to the type of mortgage you’re seeking. Here’s a comprehensive overview of the varied condo mortgage eligibility prerequisites, as outlined by Orlando Miner, principal of Miner Capital Funding in St. Louis.

  • Minimum down payment ranging from 3 to 5 percent
  • Minimum credit score of 620
  • Debt-to-income (DTI) ratio capped at 36 percent
  • Condo unit must serve as your primary residence

You can locate FHA-approved condos via the U.S. Department of Housing and Urban Development (HUD) website. The eligibility criteria for an FHA loan are as follows:

  • Minimum down payment of 3.5 percent, with a credit score of 580 or higher.
  • Debt-to-income (DTI) ratio must not exceed 50 percent.
  • The condo unit must serve as your primary residence and meet FHA’s minimum property requirements.

Esther Phillips, senior vice president and director of Sales at Key Mortgage Services in Chicago, explains, “The FHA mandates each project to undergo review and approval by HUD or a delegated institution. Additionally, the FHA offers a spot approval process for individual units within an association, requiring similar information and documentation as for the entire association.”

To qualify for a VA loan, you must be a military member, veteran, or eligible surviving spouse. Here are the key points:

  • No down payment is required.
  • There is no minimum credit score requirement.
  • There is no maximum debt-to-income (DTI) ratio; however, you must have other “compensating factors” if your DTI ratio exceeds 41 percent, such as a higher credit score.
  • The condo unit must be your primary residence.

Esther Phillips explains, “The VA follows its own approval process, with criteria similar to both FHA and conventional financing. However, it does not permit single-unit approvals; the entire project must undergo review and approval.”

To find VA-approved condos in your state, use the U.S. Department of Veterans Affairs (VA) search tool. Simply select “Approved” and then choose your state for a list of projects.

  • The property must be in a rural location approved by the U.S. Department of Agriculture (USDA).
  • No down payment is required.
  • There is no minimum credit score requirement.
  • Your debt-to-income (DTI) ratio must not exceed 41 percent.
  • The condo unit must be your primary residence.

Here are some key considerations to keep in mind when buying a condo:

“Condo buying is similar to purchasing any other piece of residential real estate, but it differs in a few key ways,” says Nick Wemyss, a realtor at Intero Real Estate Services.

“For example, there might be restrictions on what interior renovations you can do, and there will certainly be restrictions on exterior modifications,” says Weymyss. If you tour a condo that needs updates, make sure you understand what renovations are allowed before you make an offer.

Because most condos are part of an HOA, Wemyss explains that it’s also important to understand the financial standing of the HOA. Otherwise, you might be surprised with special assessments that can increase the cost of your monthly dues.

Throughout the process of purchasing a condo, working with a real estate agent who specializes in condo sales can give you a big advantage.

“A realtor that has extensive knowledge of condo sales in the area can help buyers make the most informed decision about the unit they are purchasing,” says Weymyss.