Financing
Mortgage financing for a condo is different.
Unless you have owned a condominium, or are an agent experienced in the sale of condominiums, the process can seem a bit nonsensical and confusing.
Here is a brief explanation of the differences.
Additional Underwriting
When you use a mortgage to purchase a single family home, the mortgage company looks at two basic things:
- Does your financial profile meet the requirements of the loan?
- Is the price you are paying for the home justified by the appraisal?
When you use a mortgage to purchase a condominium, the mortgage company looks at 3 basic things:
- Does your financial profile meet the requirements of the loan?
- Is the price you are paying for the home justified by the appraisal?
- Does the Condominium Association meet the requirements of the loan?
In condominium underwriting, there is an extra step.
Underwriting the Association
When you buy a single family home, you own the dirt beneath the home and the sky above it, as well as all of the sticks and bricks required to construct the home. In other words, you own it all.
Because of the shared ownership structure, lenders need to underwrite the financial health of the association.
In a condominium, ownership is handled a bit differently. In a condo, the owner owns their space individually, and the association owns any common areas collectively. So the roof, parking lot, exterior walls, hallways, elevators, and any other common amenities are all owned by all of the owners as a collective.
What do they want to know? Many things, but here are the biggies:
- Is the association properly funded?
- Does the association have a reserve account for future repairs?
- Are any owners currently in arrears / default on their dues?
- Does the association limit the number of rentals in the building?
- How many units are sold (if the condo is new)
- What percentage of the condo is dedicated to commercial uses?
- Are all of the common areas complete?
- Are there any lawsuits pending against the association?
There are many more questions, but the ones above are the most important to a lender.
If you would like to see Fannie Mae’s condo association questionnaire, visit this link.
Mortgage FAQs
Warrantability
The term that means a condominium complies with all of the criteria is called ‘warrantable.’ A ‘warrantable’ condo means that conventional loan products are available for buyers to use to purchase condos in the specified project.
If a condominium is not in compliance with the guidelines, it is called ‘non warrantable’ and a buyer would either have to pay cash or use an alternative form of financing.
What makes a project ‘non-warrantable’? Well it can be many things, some of which are easily remediable, while others are not.
Rental Density
Another common reason for a condo project to become ‘non-warrantable’ is when more than 50% of the owners rent out their units.
At Hook and Ladder, our documents cap rentals below 50% so that any purchaser should be able to have the full range of mortgage products available to them. This protects values for the owners and helps ensure that the investment in a Hook and Ladder loft is a good one.
Commercial Space
Most conventional mortgages cap commercial uses in a condominium to no more than 10% of the available space in order to maintain warrantability in the eyes of mortgage lenders.
The commercial space at Hook and Ladder accounts for roughly 3% of the overall space, making it well within the guidelines.
It is also important to note that the allowable uses in the commercial space is basically limited to office uses, meaning that the use will blend well with the residential owners.
Other Questions About Financing a Condo?
Can I rent my unit?
Yes, provided that you are not the condo that cause the rental density does not exceed 50%. The condo documents you received will detail all of the regulations with regard to renting.
Do I need a homeowners insurance policy?
Yes, but it works differently than insuring a single family home. Since the association owns the common elements (roof, hallways, parking, exercise room, etc.) they are responsible for insuring those areas –– the unit owner is responsible for insuring their own space.
A portion of the dues you pay go towards the insurance on the common elements, while your policy insures within your unit. Typically, the insurance cost for the unit below a single family home since much of the insurance burden is the responsibility of the association.
What if we need to pay for a big repair?
A portion of your monthly dues goes into a reserve account. The reserve account is responsible for collecting enough money so that the anticipated cost of any repairs is available when they are in need of replacement. The unit owners association will hire a management company to manage the finances of the building, or possibly manage this on their own if they are capable of condo association management.
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