Condominium Financing is different than financing a single family home because mortgage lenders view condominium financing as riskier mortgage loans. Condominium financing used to be easier to qualify for but now it is getting harder and harder. In order to qualify for a FHA condominium mortgage loan, the condominium complex needs to be on a FHA APPROVED CONDOMINIUM list. You can have a solid bona fide FHA pre-approval but if the Condominium Complex is not FHA approved, you can not qualify that particular condominium with a FHA Loan. You would need to purchase it with a conventional or portfolio loan. Many condominium complexes are not renewing their FHA condo certifications so it is becoming more difficult for FHA only approved mortgage borrowers to purchase a condominium with a FHA insured mortgage loan.
Before You Make An Offer On A Condominium, Consult With A Loan Officer
Before you submit an offer on a particular condominium unit, please consult with a mortgage loan originator who is experienced with condominium financing. Just not being FHA approved is not the only issues. There are two classes of condominium financing. Warrantable and non-warrantable condominiums. In order to get conventional financing on a condominium, the condominium complex needs to be warrantable. What warrantable means is that 51% or more of the condominium owners needs to be owner occupants. Condominium complexes who are 51% or more investor owner, rentals, are classified as non-warrantable and you cannot get conventional financing on non-warrantable condominiums. I also do specialize in non-warrantable condominium financing, however, they are all portfolio loans and are 30 year mortgage loans but adjustable rate mortgages; 3/1 ARM, 5/1 ARM, 7/1 ARM.
Processing And Underwriting Condominium Financing
As mentioned earlier, processing and underwriting condominium financing requires a lot more work than underwriting a single family home. Not only does the condominium mortgage loan borrower needs to be approved, so does the condominium unit and the condominium complex. Condominium underwriters will look at the percentage of the rental units in the complex compared to the percentage of owner occupied condominium units. Mortgage lenders do not like a large percentage of rental units and if the rental units exceed 50%, then they cannot do the condominium loan because it is classified as a non-warrantable condominium. Condominium mortgage loan underwriters will also look at the number of units one person or entity owns, especially if one person or entity owns more than 10% of the condominium units in a condominium complex. Many mortgage companies will not finance a condominium complex where one person or entity owns more than 10% of the units due to the risk factor if the owner defaults on the units, a large percentage of the condominium complex will be vacant.
Financials of the condominium units will be required and reviewed by the condominium mortgage loan underwriter, especially reserves. Red flags in financials include if more than 15% of the total condominium units in the complex are in arrears or delinquent on their monthly homeowners association dues. This is a major risk factor when the condominium homeowners association cannot collect timely association dues because it cannot fund the reserves in case of major repairs for the condominium building.
Reserve funds is extremely important. At least 10% of the condominium homeowners associations’s annual income needs to be allocated towards the condominium reserves in order for condominium mortgage lenders to be able to approve a condo mortgage loan in that condo building. Reserves are important in case the building may need major repairs like a roof, windows, balconies, elevator repairs, parking lot repairs, and other unexpected repairs.
Mixed Use Condominium Units
There are condominium units that are part of a building that has commercial units. For example, the first floor may be commercial store fronts and the upper level are residential condominium units. Many mortgage companies will not finance these types of mixed use condominium units unless the commercial units are limited to 20% or less of the condominium complex total square footage.
Gustan Cho NMLS 873293
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