The Condo Financing Maze
LESLIE WATERS HEIMER
Providing a high touch lending experience for Orlando, FL.
With low inventory and fewer options for first time home buyers and affordable housing, it is important to understand the rules of engagement when it comes to financing a condominium.
Condos and co/op units follow a different set of underwriting guidelines, and frankly mortgages are more difficult to procure. Unlike a detached single-family residence, a condo unit is greatly impacted by the other units within the project.
When seeking out financing on this type of property, it is critical that you deploy a licensed and knowledgeable mortgage lender with experience specific to Florida condominiums to help you navigate the condo financing maze. With condos and co-ops, it’s not just the income and assets or credit score of the Buyer, but the entire condominium development that must illustrate their fiscal and physical health. In some cases, even the Board of Directors of the Home Owners Associations must be underwritten.
Conforming mortgage rules for condos
Conventional financing provides the best rate and terms for home buyers. Over recent years underwriting guidelines for lending, homeowner’s insurance, and building codes have consistently undergone changes in Florida. The hurricane activity in the sunshine state continues to impact these industries in an effort to protect the homeowner. A conventional mortgage is FNMA (Fannie Mae) or FHLMC (Freddie Mac) eligible and meets the underwriting guidelines of these Federal programs.
Both Fannie Mae and Freddie Mac use the term “warrantable” to describe condominium projects and properties against which they’ll allow a mortgage. Condo projects and properties which don’t meet Fannie Mae and Freddie Mac warrantability standards are known as non-warrantable.
Non-warrantable condos are not eligible for financing with most banks and private lenders. American Liberty mortgage has programs specific to these non-warrantable scenarios.
To be warrantable, the condominium project must meet the following minimum criteria:
- No single entity owns more than 10% of the units in a project, including the developer
- At least 51% of the units are owner-occupied (this can be the biggest challenge in vacation destination areas like Orlando, for example)
- Fewer than 15% of the units are delinquent with their association dues
- The homeowner’s association (HOA) is not named in any lawsuits
- Commercial space accounts for 25 percent or less of the total building square footage
Common non-warrantable properties include condotels, time shares, fractional ownership properties, and other projects which require owners to join an organization, such as a golf club.
Non-warrantable condos often require a much larger down payment and may have a higher interest rate. That said, if additional funds are not available for down payment, the purchase of a non-warrantable condo may not be an option.
When previewing condos for purchase, ask your real estate agent about the building’s warrantability before you go any further.
FHA and VA mortgage rules for condos
VA and FHA home loans are government-backed mortgages. FHA loans are insured by the Federal Housing Administration. VA loans are loans guaranteed by the Department of Veterans Affairs.
Both loan types are known for their more flexible lending guidelines than conforming mortgage financing. The FHA and VA maintain lists of approved communities, but do not despair of the unit you want isn’t in a development on those lists. Both agencies have made it easier for condo and co-op associations to get their buildings approved, as they have updated the condo eligibility approval process. A few key elements to keep in mind are below:
- The borrower must meet “standard” FHA mortgage guidelines
- At least half of a project’s unit must be owner-occupied
- In a newly-built project, at least 70% of the units must be sold
In general, if Fannie Mae or Freddie Mac have already approved a building, the FHA and VA will also authorize lending there.
In this ever changing and dynamic real estate market, do not leave your condo purchase to just anyone. It is critical that you select the right team to represent your best interests. Only an experienced Real Estate Agent and Mortgage Lender can ensure the successful navigation of the process!
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