In the future, purchasing a condo may become easier thanks to potential new FHA borrowing guidelines. For nearly a decade the National Association of Realtors (NAR) has urged the Federal Housing Authority (FHA) to make it easier for condo buyers to qualify for FHA-issued mortgages.
Recently the Department of Housing and Urban Development Deputy Secretary, Brian Montgomery, stated that progress is being made on that point and added, “HUD has been in the process of revising our condominium project approval requirements and is moving closer to updating the policies.”
Obtaining financing for the purchase of a condominium has historically been an issue for buyers. Most homebuyers require a mortgage to finance the purchase of a home, and condo buyers are no different. However, the rules for condo loans vary between FHA (Fannie Mae) loans and conventional loans. Condominiums have often been referred to as “non-warrantable” due to these FHA restrictions.
Unlike mortgages for single-family residences, the condo association must also qualify in order for a condo mortgage to be approved. Lenders follow guidelines set by the Federal Housing Authority (FHA). These rules stipulate that the condo must be included on the condo-approved list according to HUD requirements. If the development is not on the list, borrowers must get conventional financing.
Additionally, at least 80% of all FHA loans in the complex must be for owner-occupied units, and at least 51% of the total building units must be owner-occupied.
FHA guidelines also state that the condo complex must have been completed for at least one year, with no pending additions or phases. This makes loans for pre-construction units impossible.
Lenders, whether FHA or conventional loans, will not approve loans if the condo association shows questionable financial health. Lenders typically want to see at least 85% of HOA (Homeowners Association) dues paid on time, adequate and appropriate insurance coverage – including flood, hazard and liability – and sufficient budget reserves. Similarly, no pending litigation that could result in costly legal fees and lawsuits, and no anticipated special assessments.
Condominium developments identified as being non-warrantable (not approved for FHA), because the above conditions have not been met, left many buyers with limited options. Paying cash or using seller financing are some of the workarounds.
Another scenario is to work with a small bank or credit union to get a portfolio loan, where the lender keeps and services the loan. As expected, portfolio loans usually require paying a higher interest rate and higher down payment.
The proposed changes to FHA guidelines could be a game-changer for condo buyers. The proposed ruling involves loosening the requirements that must be met for borrowers to use FHA-insured mortgages to finance the purchase of condominium units. NAR says it supports the new rule, including provisions that:
- Relax guidelines that require condominium projects to have a certain level of owner-occupied units
- Allow condominium projects with up to 45% commercial space to be eligible for FHA financing
- Streamline the FHA-financing certification process for condominium projects with a five-year approval period for project certification
Whether FHA or conventional loan, obtaining financing is a major consideration for almost everyone interested in purchasing a condo. As a borrower, the lender will evaluate your credit worthiness as well as the financial health and physical condition of the entire development where you hope to buy.
In general you will need a FICO credit score of at least 580 to qualify for an FHA loan, and a score of 620+ for a conventional loan. Lenders also want to see a low debt to-income ratio, plus solid employment history.
The mortgage process begins with pre-qualification. To get pre-qualified, buyers will meet with the lender and provide financial information so the lender can determine how much money you can afford to borrow. The next step is pre-approval, at which time the lender checks your credit score and verifies financial and employment information.
Once you find a condo and make an offer, the mortgage loan application process begins. Assuming all goes well with the loan processing, the buyer moves on to closing, takes title to the property and possession of the condo.
Financing is just one of factors that make purchasing a condo different from buying a single-family residence. In fact, there are several factors you need to consider before you signing an agreement to purchase a condo home.
Each condominium community has its own rules and regulations, association fees, management company and amenities. Be sure to do your research and due diligence before making your final decision.
Buyers in the market to purchase a condominium should consider hiring a real estate professional who has experience with the intricacies of condo transactions. Buying and selling a condo is much different than a single-family home. In particular, the purchase contract as well as the contingencies are different.
One main difference to consider when purchasing a condo, is that most condominium communities will require a contract to be signed in addition to the typical sales agreement prior to closing. The condominium homeowners association (HOA) is responsible for this contract which requires that buyers understand and agree to HOA rules and regulations.
In most communities there is a monthly, quarterly, bi-annual or annual fee required by each homeowner. These fees are used to cover common expenses such as insurance and maintenance. A well-run HOA will be glad to share their financial statements with a prospective buyer. It is important to know that the community has a sufficient amount of money in reserves in the event a major repair is necessary. Buyers should also know how the fees are allotted to specific services.
The HOA fees may also impact on whether the potential buyer can afford the condo or not. When approving a buyer, the lender will add the fees to the monthly debt of the buyer to ensure that the mortgage fees cover the expenses.
These are just some of the differences to be considered, and why it is important to work with an agent who has experience selling condos and guide buyers through this process.