Condos are a popular choice for people seeking low-maintenance living. But while these shared-space properties can offer convenience and desirable amenities, getting a mortgage for a condo is more complex than getting a mortgage for a single-family home or townhouse.
Verify your home buying eligibility. Start hereIn this article (Skip to...)
- What is a condo?
- What are condo loans?
- Condo loan requirements
- Warrantable vs non-warrantable condos
- Condo loans FAQ
What is a condo?
A condominium, or condo, is a type of housing that combines elements of apartment living with individual homeownership. Some condos look similar to apartments. The difference, though, lies in ownership.
Verify your home buying eligibility. Start hereCondo residents own their individual units, while apartment tenants rent from a landlord or property management company. This ownership difference comes with varying levels of control and responsibility.
Condo owners have more freedom to personalize their living spaces compared to renters, who may deal with restrictions set by their landlord.
People living in condos also share ownership of common areas, such as swimming pools, gyms, and community clubhouses.
Pros of living in a condo include:
- Low Maintenance: Condos are typically smaller, making them attractive to buyers who want the benefits of ownership without the extensive upkeep.
- Amenities: Many condos have desirable amenities like pools, fitness centers, and communal spaces that residents can enjoy.
- Affordability: Condos are often more affordable, making them popular among first-time buyers.
Cons of living in a condo include:
- HOA Restrictions: Homeowner Associations (HOAs) that manage condos may impose rules and restrictions that limit personal freedoms.
- Fees: Condo owners are required to pay monthly HOA fees to cover shared expenses. This adds to their overall monthly cost.
- Limited Privacy: Close proximity to neighbors can reduce privacy compared to single-family homes.
- Resale Challenges: The resale value of condos is influenced by factors like the overall health of the HOA and market demand.
- Ownership Issues: Decisions regarding common areas and property management are made collectively, which can lead to disagreements among condo owners.
What are condo loans?
A condo loan is a mortgage designed for buyers looking to purchase a condominium.
Even though condo loans function like standard mortgages, they also take into account the unique aspects of condo ownership. Namely, the complexities associated with communal living.
Verify your home buying eligibility. Start hereIf you’re buying a condo, your lender evaluates your credit score and income to determine your eligibility and mortgage rate.
However, a key difference between a condo mortgage and a standard mortgage is that your lender will also assess the condo community before approving funds.
They’ll review the financial stability of the HOA, calculate the ratio of owner-occupied units to rentals, and check for pending legal issues that could impact the property’s value.
If the condo project meets their criteria—and you meet the loan program’s requirements—your lender will approve the loan.
Condo loan requirements
You can use different types of loans when buying a condo. The most common ones are conventional loans and government-backed loans like FHA, VA, and USDA loans.
Verify your home buying eligibility. Start hereConventional Loans
Conventional condo loans are offered by private lenders and backed by Fannie Mae or Freddie Mac. These typically require a down payment ranging from 3% to 20% of the condo’s purchase price.
FHA Loans
FHA loans are popular among first-time buyers due to their lower down payment requirement (as low as 3.5% of the purchase price). However, they must meet specific requirements to become FHA-approved condos.
For example, the condo project must be on the FHA-approved list. Additionally, at least 50% of the condo units must be owner-occupied, and no more than 10% can be owned by a single investor.
VA Loans
VA loans are exclusively available to veterans, active-duty military personnel, and eligible spouses. These loans don’t require a down payment and offer favorable interest rates.
For condos to be eligible for VA financing, the condominium project must be financially stable, have a low ratio of delinquent dues, and a satisfactory owner-occupancy ratio.
USDA loans
To purchase with a USDA loan, the condo must be located in an eligible rural area. These loans allow low-to-moderate income borrowers to purchase with no money down. The USDA’s property eligibility tool can help you locate eligible condo communities in your area.
What is a warrantable and non-warrantable condo?
When considering condo ownership, it’s crucial to understand the distinction between warrantable and non-warrantable condos, as this classification can impact your mortgage options.
Verify your home buying eligibility. Start hereWarrantable Condo
A warrantable condo is one that meets the criteria set by Fannie Mae, Freddie Mac, and government-backed loans.
These criteria ensure that the condo project is financially stable, well-managed, and represents a sound investment for both individual owners and lenders.
Since warrantable condos are a lower risk for banks, these properties have more financing options (conventional, FHA, VA, and USDA loans).
Common features of a warrantable condo include:
- a high percentage of owner-occupied units (at least 51%)
- a limited number of commercial spaces (accounts for no more than 25% of a building’s square footage)
- a low rate of delinquent homeowner association dues (less than 15% of owners in debt to the HOA)
- no lawsuits against the HOA
Non-Warrantable Condo
A non-warrantable condo doesn’t meet the guidelines established by conventional and government-backed loans, making these a riskier investment for mortgage lenders.
Common reasons for a condo to be considered non-warrantable include a high percentage of investor-owned units, ongoing litigation involving the condo association, and excessive commercial space.
Given these factors, getting a mortgage for a non-warrantable condo is more challenging. Obtaining financing will likely require getting a mortgage through a portfolio lender.
These lenders retain some of the loans they originate, instead of selling them on the secondary market. Therefore, they can set their own borrowing guidelines.
Keep in mind, a portfolio loan for a non-warrantable condo might have a higher interest rate or stricter down payment requirements due to their riskier nature.
The bottom line
Condos are ideal for people seeking low maintenance and on-site amenities, but financing these properties could present some challenges.
Not all condos are created equal in the eyes of lenders. Therefore, your lender will assess your financial health, and the financial health of the condo project before approving your home loan.
Talk to your mortgage lender to discuss your options for condo financing.
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Condo loans FAQ
The minimum credit score required to purchase a condo can vary depending on the lender and the specific loan program. Generally, conventional mortgage lenders often look for a credit score of 620 or higher. However, some lenders may require a higher score, while government-backed loans like FHA loans might have more flexible credit score requirements, sometimes allowing for scores below 620.
Obtaining a loan for a condo can be more challenging due to factors such as scrutiny of the condo association’s financial health, the shared ownership structure perceived as higher risk, and potential market fluctuations affecting condo values, making lenders more cautious.
Condo loan mortgage rates can sometimes be higher than those for single-family homes. Due to their complexity, condos are perceived as carrying a higher level of risk for lenders. Be sure to shop around and compare interest rates from different lenders to secure the most favorable terms.
A condo may be deemed non-warrantable if it fails to meet eligibility criteria set by entities like Fannie Mae and Freddie Mac. This is often due to factors such as a high percentage of investors, financial instability in the condo association, concentration of ownership, ongoing litigation, commercial space within the development, insurance issues, or delinquencies in association dues.
