If you are in the market to purchase a condominium, it is important to understand that the mortgage process for financing a condo is different than that of a single family home. Recent changes to these guidelines have also implemented distinctions between “attached” condos, “detached” condos, and PUDs (planned unit developments) further complicating the rules with regard to financing.
The way I describe the process to borrowers is that buying a single family home requires an evaluation of two components: (1) the borrower – their credit history, income, assets, etc. and (2) the property – its value, stability, safety, etc.
When buying a condo, a third element must now be evaluated: the condo project.
Some of the risks associated with condo projects include:
- The financial stability of the project.
- The condition and marketability of the project.
- Limitations on the unit owner’s ability to control the decision making for the project.
- Litigation involving the project.
- Insurance to protect the project from unexpected losses.
The documentation that the lender will require to review the project viability will differ depending upon the type of unit (attached or detached) type of project (see below) and type of mortgage transaction (primary residence vs. investment property, loan-to-value ratio, etc.). Project types and Types of Review are explained further below.
There are 6 categories of “Project Type”:
- New Condo Project
- Established Condo Project
- Two to Four Unit Condo Project
- Manufactured Home Project
- Co-op Project
- Planned Unit Development (PUD)
This article will focus on the most common projects; new and established condos and PUDs. If you are purchasing in one of the other type of projects you will want to speak with a loan officer to get an understanding of the limitations and requirements of those specific projects.
New and Established Condo Projects
A new condo project is defined as one in which fewer than 90% of the units have been conveyed to owners and the project is not fully completed or subject to additional phases. Conversely, an established condo project has at least 90% of units conveyed to purchasers and the project is 100% complete with no additional phases.
A PUD is a project that consists of common property and improvements that are maintained by an HOA for the individual PUD unit owners.
Generally there are two types of reviews:
- Full Review
- Limited Review
As the name implies, a full review will be significantly more detailed than a limited review. A limited review will focus mainly on determining whether the appraisal and insurance on the project are adequate, that the project is not one that is considered “ineligible” such as a “condotel” or other type of project that allows for temporary or daily rentals and that it does not consist of manufactured homes. Your lender can provide more details on whether a project is considered “ineligible”.
A full review will consider additional items such as a review of the condo budget, reserves, litigation, delinquent assessments, etc. The HOA must complete a “condo questionnaire”. This will help the lender to assess the current status of the project. It will help to provide answers to questions about litigation and delinquent homeowner’s assessment. For example, Fannie Mae requires that no more than 15% of unit owners are past due on their assessments more than 60 days. In a recent rule change issued in November 2014, this time period was increased from 30 to 60 days.
The following chart will give you an idea of the extent of review you should expect based on the unit type, transaction type and project type:
Attached Unit / New Project
Attached Unit / Established Project
Detached Unit / New or Established Project
As you can see, making a larger down payment on a condo is good idea in order to limit the extent of the project review. Investment properties, however, will require the full review regardless of the down payment amount.
There are also liability insurance requirements that must be met. There have been recent changes in those requirements as well. The most recent rules state:
Liability insurance coverage is required and must be verified as part of the review of a condo project with the exception of projects reviewed under the “limited review” method. In addition liability insurance coverage is also required and must be verified for attached units in new PUD projects.
This means that attached townhomes, not just condos, in a PUD would be required to show this insurance coverage and appears to be a reversal of a previously issued requirement that ALL units in a PUD, whether detached or attached provide this coverage.
This article focuses on the requirements of Fannie Mae conventional lending. Condos may also be purchased under the FHA program and other government programs, which have their own set of rules. In general, if considering purchasing a condo with FHA financing, the condo must appear on the HUD list of approved condos.
After this article’s launch, we created an infographic to better demonstrate how condo mortgages differ from mortgages for single family homes.