Conventional Financing for Condos

At first glance, one may think, “is there really a difference between a condo and a townhouse?” The answer is yes — when it comes to obtaining a mortgage on the property, the difference is tremendous. Determining if the property is a condo or a townhome, comes down to the legal description for the property; it’s a bit complicated because sometimes a project is called “ABC Townhomes”, but the legal description tells us it’s really a condo. The determining factor will always be the legal description; for example, a townhome (or detached home) have a legal description that includes the words “Lot ?? and Block ???” , while a condo’s legal description includes something like “??? Condominiums, unit ??”. Your Realtor and I can help determine this for you.

CONDOS NEED TO BE WARRANTABLE

If you are purchasing a condo, the project needs to be “Warrantable” by Fannie Mae or Freddie Mac guidelines, in order for you to be able to secure financing on the property. What does it mean to be warrantable? This means that the condo complex, and the HOA meet certain guidelines created for Conventional loans. We can determine if your condo meets these guidelines by reviewing a “Condo Questionnaire” and current budget that the HOA will complete.

This questionnaire is comprised of 24 questions, per Conventional loan guidelines, that when answered by the HOA, will tell us whether the condo project is “warrantable” (i.e. you can secure financing and close) or not. Some of the most common questions on these questionnaires are the following:

• Does one person/entity own more than 10% of the units in the complex?

• What is the ratio of owner occupied vs. rented units? For example,  If you are buying the condo as a rental property, it must be at least 51% owner occupied.

• Is the HOA involved in any litigation?

• Does the HOA have sufficient insurance & reserves in their budget?

• What percentage of the homeowners are 30 days or more behind on their HOA dues?

• If the condo has been recently converted or built, what percentage of the units are sold or under contract?

• If the condo has retail space in the building, what percentage does it make up of the total space?

Our goal is to have the questionnaire completed and reviewed as soon as possible; if it turns out that the condo does not meet guidelines, you can terminate the transaction before you spend any money on inspections or appraisal. Please note that some HOAs charge $50-$200 to complete these questionnaires, so that is an investment that will have to be made upfront in those cases.

 

MORTGAGE RATES CAN BE HIGHER FOR CONDOS

In April 2009, Fannie Mae and Freddie Mac installed new “loan level pricing adjustments” for condos. A 30 year fixed mortgage rate for a condo will be anywhere from 0.25%-0.5% higher, than it would be for non-condo property, even with great credit scores. This pricing adjustment is in effect for every borrower who is putting a down payment of less than 25% of the price.

For “Lot & Block” properties like detached homes/townhomes, none of these extra steps are required. These are the biggest differences between purchasing a condo versus a townhome/detached home, in today’s market.

Probably WAY more than you wanted to know, but I hope it helps.