Low-Maintenance Living At A Reasonable Price
Buying a condo provides a number of advantages to home buyers.
First-time buyers can enter the housing market at a lower price point with condos.
Both new and repeat buyers enjoy more free time not spent on yard maintenance and outdoor projects. And many condominiums are available within major employment centers, making commutes easier.
But financing a condo is a little different than getting a mortgage for a single-family home.
Conventional loans from Fannie Mae or Freddie Mac, as well as VA and FHA home loans, must meet the corresponding agency’s guidelines.
These entities back ninety-four percent of condominium mortgages according to the housing research arm of Urban Institute. Chances are you will obtain financing through one of them too.
Condo financing options are widely available, and buyers should know a few key points to get a better started on their condo purchase.
Buying A Condo With A Fannie Mae Or Freddie Mac Loan
Conventional loans are those provided by local and national lenders, and approved by Fannie Mae and Freddie Mac guidelines.
Fannie and Freddie do not have a long list of approved condominium projects, although they do maintain an online database.
The database may have just a few, or even zero, condominiums in your state. This does not mean you can’t get a conventional loan on your condo.
Rather, most condominiums will require what is called a “limited review.” This review is in the form of a questionnaire that your lender sends to the condo’s homeowner’s association (HOA).
The property manager or HOA representative completes the form and send it back to the lender. If the condominium meets requirements, the buyer can purchase the unit with a conventional loan.
To be eligible for a limited review, however, you must put down at least ten percent for a primary residence or 25 percent down for a second home. Rental properties are ineligible for limited review.
Limited review criteria are as follows.
- Commercial space is less than 25 percent of the project’s square footage
- 10 percent of HOA dues are allocated to reserves
- Fewer than 15 percent of units are in arrears with their dues
- More than half of the units are owner-occupied
- Insurance meets GSE guidelines
- There can be no pending lawsuits over safety or habitability
- The units are at least 400 square feet
Also, condominium units may not be advertised with daily rentals or other hotel-type
There are also requirements for ownership distribution. No single entity can own more than ten percent of the units unless there are five to 20 units; in that case, a single entity can own two units.
Conventional Condos That Don’t Meet Limited Review Standards
Most condominiums will be eligible for a limited review. These simple reviews often take only days or hours to receive, depending on responsiveness of the HOA.
But ineligible projects need a full review. The guidelines of a full review are stricter and it involves a lot more time and paperwork.
If your prospective condo does not meet limited review standards, make sure the lender is willing to complete the full review process. Also, get an estimate on the amount of time it will take. Request extra time from the seller before agreeing to a closing date.
Many condo buyers may want to pass on a condo project that requires a full review, or see if the project qualifies for FHA or another financing type.
FHA Condominium Search
FHA does not have a limited review process as is available for conventional loans. Instead, FHA maintains a list of approved condos.
FHA approved condos are available in most towns and cities around the country.
Homeowners association leaders are realizing the need for FHA approval for their condo complex. It increases the owners’ ability to sell and encourages new residents to move in. This leads to fewer foreclosures in the building and more residents paying HOA dues which enables ongoing maintenance of the condo building.
These benefits have prompted HOAs to prioritize FHA approval. More complexes are being approved by FHA each month.
Buyers can look up a condo’s FHA approval status with a lookup tool on the Department of Housing and Urban Development (HUD) website.
The publicly-available search tool allows queries by state, county, condo name, or ZIP code.
Condos must be in “Approved” status and have an approval expiration date in the future. FHA requires condos to get re-approved every two years. For this reason, there are many approved projects whose approvals are expired. Units in these complexes are not eligible for FHA financing.
FHA approved condos have become harder to find compared to pre-recession times, according to The Washington Post. Only about 20 percent of communities that made the list in the late 2000s are still approved.
Still, FHA condos can be found. The state of California contains more than 1,700 approved, non-expired condo communities according to HUD’s search tool. Over 150 approved complexes are in Florida, and Texas contains nearly 200.
Because FHA approval is sought after, complexes use this status as part of their marketing efforts. This makes it easier to find an approved unit. As non-approved condo communities see this success, they will make efforts to get on, and stay on, the FHA approved list.
But approval does not happen overnight. It can be a lengthy process. Buyers should only make an offer on condos that already have FHA approval.
VA home loans are available to condo buyers with eligible military experience.
For these home buyers the Veterans Administration (VA) maintains an online searchable database of approved projects.
VA’s list of approved condos is quite extensive – much larger than that of FHA. The following are the counts of approved condos in major cities around the U.S.
- Charlotte, North Carolina: 392 approved projects
- San Diego, California: 1153 approved projects
- Austin, Texas: 199 approved projects
- Seattle, Washington: 432 approved projects
VA has its own approval process, for which HOAs can pay a fee and submit paperwork. The process can take 90 days or more, however, so eligible veterans should look for condos that are already approved.
Generally, the buyer does not, and should not, get involved in approving a condo complex. This expense and process should be left to the HOA representatives, lenders, and the approving agency.
Buyers should focus on finding an affordable condo project, and making an offer on an available unit.