How to finance a condo

If you want to buy a condominium unit, and you’re not paying cash, this article is for you.

If you finance your condominium with a Fannie Mae, Freddie Mac, VA or FHA home loan (between them they have 94 percent of the mortgage market), your condominium project must meet the guidelines of the corporation or government agency that backs your loan. Here is what you need to know to buy a condominium.

The biggest obstacle for condo buyers is the shortage of approved developments. According to industry estimates, only about 20 percent of formerly-FHA-approved projects are still approved for FHA financing.

Buying a condo with Fannie Mae or Freddie Mac financing

While Fannie Mae has streamlined the process by which condo developments can obtain approval, the reality is that very few projects are approved. To see if a condo you’ve got your eye on is eligible for Fannie Mae or Freddie Mac financing, have a lender check to see if the project is already approved. As well, the condo board may know, too, so you might check with them. Don't be surprised, however, if your state has just a handful (or even zero) of condos already approved.

If you want to buy a unit that’s not on the approved list, you may be able to request a “limited review.” A limited review is conducted by the lender using a condo limited review questionnaire that’s completed by the property manager or head of the homeowner’s association. To be eligible for a limited review, you must put down at least 10 percent for a primary residence or 25 percent down for a second home. In Florida, the rules are different: To be eligible for a limited review, you'll need a 25% down payment (and 30% down for a second home or investment property).

Some of the Limited Review criteria are:

• The unit being financed must be an attached unit in an existing, established condo project
• For a primary residence, the minimum downpayment is 10%
• For a second home, the minimum downpayment is 25%
• Commercial space can comprise no more than 35 percent of the square footage of the building
• At least 10 percent of association dues must be allocated to reserves
• Fewer than 15 percent of units must be in arrears with their dues
• More than half of the units must be owner-occupied
• Insurance must meet GSE guidelines
• There can be no lawsuits over safety, structural soundness, habitability or functional use of the project
• For buildings under 20 units, no single entity can own more than 2 units; with 21 or more units, up to 20% can have a single owner
• Condominium rentals are not advertised with daily rentals or other hotel-type amenities.

Projects ineligible for a limited review are subject to a “full review.” The guidelines of a full condo review are more explicit:

• The unit being financed is in a new or newly-converted condo project
• For investment property transactions, at least 50 percent of units must be owner-occupied or second homes
• No more than 15 percent of association dues delinquent more than 60 days
• No single entity owns more than 20 percent
• Maximum commercial space is 35 percent
• No construction defect litigation. All other litigation will need to be reviewed.
• HOA has a budget–line item for replacement reserves of at least 10 percent of assessments/income being collected
• Condominium rentals are not advertised with daily rentals or other hotel type amenities (minimum three-day rental period)
• Insurance coverage must be sufficient (hazard, flood, liability, fidelity and HO6 if required)
• Plus, additional review of condo docs to address:

a. Compliance with laws
b. Limitations on ability to sell or first right of refusal
c. Amendments to docs
d. Rights of mortgagees and guarantors
e. First mortgagees rights
f. Unpaid dues

Limited and full project reviews have a duration of 180 days.

There are also plenty of caveats and restrictions too intricate to detail here.

FHA condominium financing

FHA condominium approvals are more straightforward. You can look up a condo’s FHA approval status on HUD.gov. Projects that meet FHA standards can be submitted for approval directly to the FHA, or they can be approved by “Direct Endorsement” FHA lenders which have been granted the authority to make that determination. If a condo project is submitted for FHA approval, the process generally takes about 30 days. Individual units in complexes that aren't fully approved may be eligible for Single-Unit Approval (SUA), also available through lenders with Direct Endorsement Underwriters.

HUD charges no fee to associations or individuals seeking approval for their condominium projects.

Single Unit Approval Requirements

In addition to other criteria, units eligible for SUA also must meet the following requirements:

• The condo project contains at least five units
• If fewer than 10 units, not more than 2 units may have FHA-backed financing
• If greater than 10 units, not more than 10% of the units can have FHA-backed financing
• Maximum commercial space is 35 percent
• 50% of the units must be owner-occupied with no exceptions
• The unit must be at least 400 square feet

To learn more about FHA loans, read “Advantages of FHA mortgages.”

Financing a condo with a VA loan

For condominium buyers seeking VA home loans, the VA maintains a searchable database of VA approved condo projects on its website. Lenders must submit a written request for VA-approval to the VA and a copy of the condominium’s organizational documents. The VA examines the condominium’s organizational documents for compliance with VA regulations, and notifies the requesting lender/sponsor within 30 to 90 days. To speed up the process, the VA recommends that lenders or homeowners supply an attorney’s opinion stating that the community meets VA guidelines.

See current VA mortgage offers

Adjust your timeframe when financing a condo

If you’re financing a condominium purchase, plan on a longer processing time. Lenders have to assemble a lot of paperwork and conduct interviews before submitting a package to the authorities who approve projects for mortgages. It can add 30 to 90 days to your escrow, and this should be considered when you’re deciding to lock in an interest rate. The good thing about the requirements for condo approval is that, by refusing to lend on riskier properties, mortgage lenders protect you at the same time they protect themselves.

This article was updated by Keith Gumbinger.