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Condominium Financing

condo financing brookfield wisconsin

Many buyers, first time buyers or not, are looking to buy a condo. In this next installment of our First Time Buyer Education Series, we’ll tackle the topics related to lending and condos. 

In today’s lending environment, financing a condominium unit can be challenging. The strict lending rules make it difficult to qualify for a condominium mortgage. Beyond that, the loan closing costs may be higher on a condo than for the same loan on a different type of real estate. For example, the mortgage interest rates are usually higher for condominiums than for the exact same loan scenario on a single-family home. Beyond that, underwriting requirements vary by type – such as Conventional or FHA (Federal Housing Administration) – and by individual lender.

Higher Standards

Credit and economic issues of the late 2000’s led to much tighter restrictions on all of mortgage lending. Condominiums are viewed as risky by the lending industry because some of their biggest losses came from defaults on condominium loans; much of which had to do with the Homeowners Associations (HOA) that control the units. Some lenders make a point of rejecting condo loans altogether though Envoy Mortgage of Brookfield does not practice this policy.

Borrower Qualifications

As with any home loan, a condominium buyer must first qualify for the loan. For the types of financing that Envoy Mortgage offers, the borrower-specific rules are the same regardless of the property type. For example, there isn’t a larger down payment requirement for a condo than there would be for a single family home. However, borrower qualification isn’t the only part to a condominium mortgage approval. The HOA or Condo Association must also qualify.

Condo Association Qualifications

The reason that condo loans are so challenging is that, unlike other types of mortgages, the condo homeowner’s association also has to qualify in order for the mortgage to be approved. This, of course, is something that the borrower has little to no control over. Lenders follow new guidelines from the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. Fannie Mae requirements stipulate, in part, that:

  • No single investor can own more than 10% of the units
  • More than 50% of the condominium units must be owner-occupied
  • All planned amenities must be finished if the development is more than one year old
  • No more than 15% of owners can be delinquent on monthly dues

All lenders, whether for FHA, Fannie Mae, Freddie Mac or conventional loans, will likely turn down loans if the condominium association shows questionable financial health. In particular, lenders will look for associations that have:

  • Adequate budget and reserves
  • Appropriate and adequate insurance
  • No anticipated special assessments or special assessments within reason
  • No pending litigation that could result in costly legal fees and lawsuits

Non-warrantable Condominiums
If a condo association doesn’t meet the standards for FHA or Fannie Mae financing, it’s referred to as “non-warrantable” and leaves few options for borrowers. Typically, these buyers can either try for a portfolio loan (contact my team for details and a referral) or pay cash for the home. In this case, the borrowers should expect to pay high down payments, possibly higher-than-average interest rates and maybe less favorable terms (such as an Adjustable Rate Mortgage or Balloon type mortgage).

Since it is in the best interest of all unit owners that interested buyers can obtain financing – because the ease of financing will certainly drive the resale value – current condo owners can ask the development’s management company if their development is FHA or Fannie Mae approved. If the development is not approved, owners can contact my team to initiate the usually-free process for obtaining approval.

When Do You Pay More Than The Cost?

As we continue in our First Time Buyer Education Series, please be sure to Never confuse the amount of your monthly payment with the actual cost of owning. A typical monthly payment includes principal, interest, taxes, insurance and, in some cases, mortgage insurance.

 Example:

$250,000 home

$4,000 per year taxes

$800 per year insurance

$200,000 30 Yr. Fixed Loan at 4%  =

The principal portion of the payment is not a cost; it’s a reduction of the loan balance. With each payment, you increase your equity by the same amount. For our example, the average principal installment for the first year is $294/month.

Owners who itemize can usually deduct the cost of interest and real estate taxes. For our example, an effective tax rate of 28% would reduce the cost by $279/month. (Avg. 1st yr. mo. interest paid of $661 + taxes of $333.33 x 28% = $279) Always consult with your tax advisor regarding your situation.

 Despite the ups and downs, over the last 50 years, annual nationwide appreciation averages more than 5%. Even using a more conservative rate of 3%, the increase in value represents $625/month.

 That brings us to:

Most of these benefits aren’t realized until you sell, so owners still have to be able to make the regular payment each month. Accumulating equity and earning appreciation take time. Consider the cost of maintenance and repairs, too. But when you think about what you would have paid in rent, it’s clear that owning a home can be a great way to build wealth.

And it’s also clear that the true cost is typically far less than what you might write on a check each month. Contact our team to get numbers specific to your purchase price range. 

Note, this scenario is just an example and not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.