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Home Purchasing

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.

What’s the potential cost of waiting?

As we continue on in our First Time Buyer Education Series, we have to address Affordability.

Affordability declines quickly when rates and prices rise together. Consider the potential change in payments with a 10% price increase and a 2% increase in interest rates:

Home Affordability in Brookfield Wisconsin

These hypothetical examples are illustrations for educational purposes only and are not an offer to lend nor a Good Faith Estimate. Examples are for a $250,000 home that rose to $275,000 with a rate increase from 4.50%/4.762% APR to 6.50%/6.95% APR on a zero point 30-year, fixed-rate loan with a 20% down payment, $4,000 in taxes and annual insurance of $580 for the “today” example and $638 for the “tomorrow” example. APRs are calculated using closing costs equal to 3% of the loan amount. Actual costs can be less, and actual rates are subject to change at any time. Qualification for any loan is dependent on individual circumstance and subject but not limited to employment/income, credit history and acceptable liquid assets to close.

 First time home buyers in the Milwaukee area currently have a historical advantage with both low rates and prices. What happens when the trend begins to shift?

You might not qualify to purchase the same house.

Unless your income keeps pace with price and/or rate increases, you may not be able to qualify for the same home you could purchase today. In the example above, the income to qualify increases from $4,038 per month to $5,127 (assuming a debt-to-income ratio of 35%). The 27% increase is much higher than the typical salary increase of about 2% or 3% per year.

In a rising market, you usually can’t out-save appreciation.

When prices are rising, it can be difficult for your savings to outpace the market. For example, if a $300,000 home appreciates by 5% in one year, that’s $15,000 or $1,250 per month. Can you add that amount to what you’re already saving each month?

If interest rates are rising, too, required payments and income increase even more.

Given the recent environment, some may discount the possibility of the 2% increase in the example above, but the 50-year average for a 30-year, fixed-rate conventional loan is approximately 8.375%. That’s almost 4% higher than rates at the time of this writing and would equate to a payment increase of more than $663 per month in the example.

Qualified borrowers have the ability to lock in today’s prices and rates. Buyers who have not yet accumulated a large down payment may find that using a small down payment and paying mortgage insurance is wiser than missing out on low prices and historically low rates.

 We’re here to help when you’re ready to learn more. Contact our team to get started on your free consultation!