Unapproved Condos And Townhomes Present Challenges
Condos and townhomes offer benefits to home buyers, like lower purchase prices than than single-family homes.
Condominiums have homeowners associations (HOAs) that take care of the maintenance — a great benefit for inexperienced homeowners.
And shared common areas may allow you to have nicer amenities — things like pools, tennis courts, and gated security.
However, unapproved (aka “non-warrantable”) condos and townhomes — those that don’t meet guidelines established by the most common mortgage programs — can be harder to finance, and harder to sell.
Know what makes a condo “non-warrantable” and if you should consider buying such a property.
Why Your Lender Might Reject A Condo Building
Reasons a condo or townhome might be deemed “non-warrantable” include:
- Homeowners association has insufficient reserves
- Inadequate homeowners insurance or flood coverage
- Too many units are rented to tenants
- Too many units are behind with their monthly dues
- The complex is under construction or in a phase that calls for more construction
- Too many units are owned by one person or entity
That’s why it’s important to leanr what is required to finance a condominium or townhome, then shop for the right mortgage based on your needs and preferences.
Don’t let the extra rules discourage you from condo buying – especially if you have your heart set on a low-maintenance unit in a shared building.
Unapproved Condo Conventional Financing
When you buy into a condominium community, mortgage lenders apply extra scrutiny to the application — both you and your future HOA must comply with a set of underwriting guidelines.
“This is because you are not the only person responsible for the condition and upkeep of the condo – it’s also up to the condo association, which is accountable for maintaining the exterior and common areas,” says Ginger Wilcox, chief industry officer at Sindeo, a San Francisco-based mortgage marketplace.
“The lender wants to know whether the property is a good risk, and the sales process could be delayed or canceled if the condo association has financial problems or the common property isn’t maintained well.”
Scarlett Tassone, Vice President and mortgage banker with PrivatePlus Mortgage in Atlanta, says mortgage loan providers each have different rules and stipulations regarding financing for a condo.
“Fannie Mae and Freddie Mac each have a set of requirements that every condo association has to meet – such as the minimum amount of funds the association has in reserves, the amount of tenants past due on their homeowners association fees, the amount of units that are rentals or investment properties, et cetera,” says Tassone.
FHA Loans For Unapproved Condos
To secure FHA financing, the condo must also be on the FHA’s approved condo list – if it’s not, the approval process may take at least an extra 30 days to complete.
For communities with very strong associations, 35 percent of the units must be owner-occupied. The rest must be at least 50 percent owner-occupied.
In addition, there are restrictions on how many units can be financed with FHA home loans — no more than 50 percent of units in a condo development can have FHA financing.
Non-Conforming Condo Loans
If you opt for a non-conforming conventional loan (not backed by Freddie Mac or Fannie Mae) to finance a condo, expect the lender to examine your application a little more thoroughly.
“Sometimes a higher down payment may be asked, and the fact that you will likely be required to pay a monthly condo association fee can skew your debt-to-income ratio negatively,” says Klaus Gonche, Realtor with Fort Lauderdale-headquartered Century 21 Hansen Realty.
Wilcox notes that most lenders will investigate whether the condo association has sufficient insurance coverage, a large enough reserve in the budget, no pending litigation, and no upcoming special assessments.
Passing The Townhome Test
If you are eyeing a townhome instead, securing financing may not be quite as complicated. That’s because townhomes are treated similarly to single-family residences by lenders.
“With a townhome, the borrower owns the lot and the walls. Although they pay fees to a homeowners association, the HOA is only responsible for neighborhood upkeep and use of neighborhood facilities,” says Tassone.
Townhomes are considered “zero lot line” homes. In other words, you share a wall and the line between your lot and your neighbor’s is essentially zero.
This type of property may or may not lie within a planned unit development (PUD). Either way, finance underwriting guidelines similar to those for single-family homes apply.
“The underwriting process for fee-simple properties with a homeowners association is currently significantly easier than for condo association properties,” notes Gonche.
Size Matters For Condos And Townhomes
However, whether it’s a condo or townhome, expect more attention from the lender if the unit is part of a smaller complex/building.
When the lending market is tight, it is often difficult to get loans on complexes with four or fewer units, according to Dana Graham, agent with Berkshire Hathaway Chairman’s Circle in Rolling Hills Estates, Calif.
“Lenders often view the risk as high because, if one of the owners gets in trouble and doesn’t pay his HOA dues, for example, that represents 25 percent of the owners in a four-unit building.”
How To Land A Loan For An Attached Home
Before trying to secure a mortgage for a condo or townhome, get your proverbial “house” in order and knowing what to expect.
Clay E. Selland, owner/broker of Signet Mortgage Corporation in Danville, California, recommends checking your credit and making sure your score is high enough for a mortgage. “Then, get pre-qualified for financing from a lender.”
Do your homework on the HOA or condo association carefully as well.
“Find out what the monthly association fees are, and make sure that you still qualify for the loan you applied for with those fees taken into account,” says Tassone.
“Get minutes from the last six months’ worth of HOA meetings to get a flavor of what’s going on, and try to attend one of these meetings if you can,” Graham says.
Get Unapproved Condos Approved
If possible, ask your real estate agent for help in recruiting the HOA/condo association to assist you in getting the property approved for financing. Be sure the association provides all the numbers and paperwork the lender requests.
Recent changes to condominium guidelines by Fannie Mae and Freddie Mac have made securing approval easier for HOAs, and many mortgage lenders are equipped to help with the process.
Tassone says to be aware of the cost of condo or association documents. “Most property management companies will not provide any documents free of charge, and the cost of these documents can range from $200-$500 or more.”
If the property is ultimately not approved by the lender, consider hunting for an approved multifamily property, or one with lower or no association fees.
“Try to be open-minded and find an experienced REALTOR® and lender who can walk you through the process and help you get those new keys,” says Gonche.
Lastly, be aware of the financial risks of owning a townhome or condo; these properties may not appreciate as quickly as single-family homes.
Alternative Financing For Non-Warrantable Condos and Townhomes
While mortgages backed by the FHA, VA, Freddie Mac and Fannie Mae dominate the market, they aren’t the only options available.
Non-conforming mortgages are offered by institutions or groups of investors that make their own rules, and some may be willing to finance an unapproved condo, especially if the applicant is very strong and has a substantial down payment.
Smaller local banks can loan on these kinds of projects to support their communities, and other portfolio lenders (those that don’t sell their loans and keep them on their own books) may offer mortgages designed especially for unapproved condos.
What Are Today’s Mortgage Rates For Condominiums?
Mortgage rates for condominiums are similar to those for single-family residences — that is, low. Check your condo-buying eligibility today, and take the next step toward financing your condo.