Condominium Home Loan Mortgage Lending Guidelines

Condominiums are very popular for first-time home buyers and millennials.

This article covers condominium mortgages for condominiums.

Many first-time home buyers decide to purchase a condominium unit to avoid the responsibility of maintaining a home. But this simple decision could affect their financing options.

A condominium borrower might be fully qualified for a single-family home loan but may not qualify for condominium financing. The reasons are twofold: Lender guidelines on condominium home loans are rather strict, and there are more requirements to meet.

Prequalify for an FHA home loan now.

What are the mortgage guidelines for single family homes versus single family homes

Mortgage Guidelines – Condos vs. Single-Family Homes

Condos are considered riskier assets than single-family homes by mortgage lenders. The financing process is more complicated as well. To approve financing for a condominium, the lender needs to underwrite the borrower as well as the condo complex. It’s actually quite common that a condo complex doesn’t qualify even though a borrower does.

Here are some additional items lenders review for condos that don’t apply to single-family homes:

  • Condo complex financials
  • Reserves and financial condition of the condo complex
  • Recent comparable sales
  • Building condition
  • Occupancy rate
  • Foreclosure rates
  • Whether the condo project is FHA-approved or not

Condominium Appraisals

There are cases where a lender doesn’t approve a condominium loan because the condominium project has no recent sales comparable to the subject unit. The lender will not accept any comparable sales outside the condo project unit; it has to be a comparable from within the condo project.

Before condo buyers go out and enter into a condominium purchase contract, they should make sure that condominium financing in place. The borrower needs to choose a lender with little or no overlays on condominium financing.

A substantial amount of clients contact Gustan Cho Associates when they are about to close on their condominium units. It usually happens at the last minute because they run into problems due to their mortgage lender’s internal lender overlays.

HUD Condominium Home Loan Guidelines

Another reason first-time home buyers purchase condominiums as their first home is because condos are much less expensive than single-family homes. A lower purchase price translates to a smaller down payment, which is easier to reach.

Financing hurdles to overcome

Unfortunately, condominium financing hurdles could surprise an inexperienced home buyer. For example, first-time home buyers and buyers with lower down payments, minimal reserves and prior bad credit cannot qualify for conventional mortgage loans. Many only qualify for an FHA-insured mortgage loan, but these loans have a unique set of approval requirements. The first hurdle condo buyers ran into used to be that the condominium complex needs to be HUD-approved.

Not all condominiums are HUD-approved. Until recently, the condominium complex had to be on the HUD-approved condominium list. If it wasn’t on the HUD-approved condominium list, the condo buyer had to seek conventional financing.

However, HUD recently resurrected FHA Spot Loans. FHA Spot Loans allow borrowers to purchase a condominium unit in a non-HUD-approved condo complex with an FHA loan. Basically, HUD makes an exception by allowing a borrower approved with an FHA loan to purchase a unit in a condo complex that is not HUD-approved.

Which home loans are guaranteed and not guaranteed

Warrantable vs. Non-Warrantable Condo Home Loans

Home buyers should expect to occupy the condo themselves. Current underwriting guidelines require that at least 51% of condominium units be owner-occupied. If more than 50% of the condominium units are rentals, the condominium may not be eligible for FHA condominium financing. Lenders believe that owner-occupied units are maintained better than rental units, and that’s the reason for this financing hurdle.

FHA Condominium Home Loans for New Construction Projects

When it comes to new condominium projects, FHA condominium financing guidelines are very strict. The project needs to be completed for a minimum of a year. No future construction phases can be in the pipeline either. Due to these FHA requirements, the initial owners of new condominium projects either need to be conventional mortgage loan borrowers or cash buyers.

FHA Spot Review for Condominium Home Loans

FHA condominium financing guidelines used to allow for FHA Spot Review. Spot Review means that an FHA condominium buyer can purchase a non-FHA-approved condominium unit. This holds true as long as the condominium association completes a condominium questionnaire.

On FHA Spot Reviews, FHA reviews it and approves the condominium financing request on a non-FHA-approved condominium unit. Unfortunately, FHA Spot Review was not available until recently. FHA Spot Loans are now back in force with certain lenders. Gustan Cho Associates allow FHA Spot Loans.

What are the home loan requirements for all housing units

Condominium Home Loan Requirements for All Condominiums

General condominium financing guidelines for both conventional mortgage loans and FHA-insured mortgage loans are as follows:

The condominium complex must be financially sound. Condominium financing mortgage lenders, whether conventional lenders or FHA lenders, want to see that the condominium project has:

  • Sufficient reserves
  • No pending litigation
  • Sufficient insurance coverage
  • No pending bankruptcy proceedings
  • 85% of units must be current with their HOA dues.
  • No more than a certain amount of units under foreclosure

The condominium complex must be free of building violations or structural issues. The project shouldn’t have any issues that could jeopardize the financial status of the condominium:

  • No foundation problems
  • No major electrical, plumbing, or electrical problems

See today’s FHA mortgage rates.

Qualifying for Condominium Home Loans with Direct Lender and No Overlays

Condominium home buyers who need to qualify for a condominium home loan with a direct lender and no overlays on condominium loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We are available 7 days a week, evenings, weekends, and holidays.

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