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How Condo Mortgages Work

Mortgage Calculation

Condos are known to cost less than single-family homes, require little maintenance, and feature amenities like gyms and security. These are what make them particularly appealing to the younger market and ideal for first-time
buyers.

Buying a condo is considered a home purchase, so the same basic evaluation
conducted when buying a single-family home will apply. The lender will take a
look at an applicant’s credit reports, tax returns, debts, investments, and assets to determine if they have the means and credit to repay the loan.

What makes condo financing different is the underwriting process. There are also other factors — such as the relationship with the homeowner association — that are important to consider as you explore condos for sale in the Bay Area.

Underwriting

The underwriting for a single-family home is simple. The bank conducts an appraisal of the home to make sure that the property’s worth matches what you will be paying for. For condos, however, the bank also places the financial health of the condo association under scrutiny. The following factors are considered:

  • Are owners consistently paying their condo fees?
  • Are there red flags in the condo’s legal documents that may indicate property depreciation?
  • How much is reserved for maintenance?
  • What percentage of the condo units are owned or occupied?
  • How much space is allocated for non-residential amenities?

Below is a brief overview of mortgage options that can help you get a better idea of what you need to prepare or look out for.

Condo financing options

Federal Housing Administration (FHA) loans

For first-time buyers, an FHA loan is seen as the most appealing option because of the low down payment requirement (3.5% of the selling or appraised value) and minimum credit score (580) for applicants. The FHA also provides an online

list of approved condos or communities, which makes one step of the loan application easier.

Here are the FHA’s basic requirements for condos:

  • At least 50% of units must be owner-occupied
  • Only up to 50% of the units can be FHA-insured
  • No more than 35% of the condo should be allotted to non-residential space

Conventional financing

This is the go-to option for buildings that are not FHA-approved but which meet the underwriting guidelines established by Fannie Mae or Freddie Mac. You can be granted this loan if the following conditions are met:

  • At least 50% of units must be owner-occupied
  • At least 10% of the condo budget must be reserved for maintenance
  • No more than 15% of the condo units can be late on HOA dues for 60 days or more

U.S. Department of Veterans Affairs (VA) loans

With no required down payment, VA loans are designed to help those in the military service, veterans, and their families purchase a home. Like the FHA, the VA’s Information Portal conveniently allows you to check if a certain building is approved or not.

VA loans generally require the following:

  • At least 35% of units must be owner-occupied
  • No more than 10% of the condo units can be late on HOA dues for 60 days or more
  • At least 20% of the condo’s budget must be reserved for maintenance
  • The condo association must provide at least three years of financial records

U.S. Department of Agriculture loans

The USDA loan is another zero-down payment loan designed for rural and
suburban homebuyers. The USDA website allows you to check which condos are approved, but it’s safe to assume that condos eligible under FHA and VA guidelines are likewise eligible for a USDA loan.

Individuals with a credit score of 640 are eligible to apply, but those with over 680 may be given more leniency in other aspects, such as a higher debt ratio.

Jumbo loans

Designed specifically to finance luxury properties or those in a
highly-competitive market, jumbo loans exceed limits set by the Financial Housing Finance Agency (FHFA). You can use a jumbo loan to apply for a condo mortgage, but keep in mind that this loan has stricter credit requirements than
conventional loans.

Other reminders

Compared to a single-family house, condos are commonly considered by lenders to be riskier loans so expect higher rates. Make sure to do adequate research to
compare rates charged by different lenders.

For loans with a down payment of less than 20%, a mortgage insurance premium will be required, so keep this in mind as you explore your options.

If you plan on buying a condo in the Bay Area, Nina Hatvany and the rest of Team Hatvany can help you navigate the process with ease. For more guidance, you may call 415.710.6462 or send an email to team(at)teamhatvany(dotted)com.

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