Understanding Condos: Lending Tips and Rules
Financing the purchase of a condominium can be tricky. Mortgage lenders view condos as a higher risk than single family homes because you are in part dependent on other owners in the condo building. Condos also have a more tedious and stringent approval process as they have to go through a full or limited “condo review” depending on the terms of financing. It’s important to understand what the process entails and the difference between townhomes and condos so you can be fully prepared when you’re listing a property and/or showing properties to buyers.
Condo versus Townhome:
The key difference between a condo and a townhome is the form of ownership. Regarding the purchase of a condominium, the homeowner owns the inside of their home but the exterior, land and commons areas are owned by the association. However, when you’re purchasing a townhome, you have exclusive ownership of the home, the roof, and the land that lies below it. It’s important to note that not all listings label the type of property accurately. To confirm the type of property, you can navigate to the local county website, search for the property address and check the legal description and plat map. For townhomes, you will typically see a lot & block number and the individual unit will be outlined on the map. When you search for a condo, there is most likely not a lot & block number but rather a CIC # and the entire building (not just the individual unit) is outlined on the map. Once you’ve confirmed whether or not the property is in fact a condo or townhome, there are several rules lenders must follow regarding condos. If you have any questions or hesitations about this piece, just send us the property address and we can confirm it for you.
Government loans (FHA or VA):
- FHA and VA loans require a specific government approval. Check with us/your lender to confirm if the association is approved (we will use a government portal to verify). If the approval has expired, the approval must be submitted directly to the appropriate government agency. The lender can call the agency to get turn times once the approval process is initiated.
- FHA and VA loans have the same down payment requirements as single family homes. FHA requires a minimum of 3.5% down whereas VA requires as little as nothing down.
- You can put as little as 3% down when purchasing a condo but anything less than 10% down requires a full condo review. The lender must obtain the following to initiate the full approval process:
- Borrower must gather condo resale documents, by-laws and articles from the seller. If you cannot obtain these documents and Alerus must obtain them, there is a fee of up to $200.
- Lender Questionnaire (completed by Alerus) which has a fee of $160-175.
- If you put 10% down or more, you can do what’s called a “limited review” which is much less taxing/lengthy and borrowers will avoid the extra fees associated with a full review. A limited review requires the following questions to be answered:
- Is it an established association? Is it existing or new construction?
- Is their pending litigation?
- Does any single entity own 10% or more of the units in the condo building?
- Non-owner occupied/investment properties always require a full condo approval as well as a minimum down payment of 20 percent.
- Rates for condos tend to be an eighth of a percent higher than market rates due to added risk.