Condos come in many forms including high-rises, converted apartment buildings and even some town-homes may be condominiums depending on how they are legally described. If you’re planning on buying a condo and not paying cash for your purchase, here are a few things to look out for where lenders may have an issue with.
- Owner occupancy ratio lower than 51%. Some lenders do not consider listed units and/or second homes as owner occupied which can make reaching the 51% owner occupied a little challenging. NOTE: Some lenders have underwriting overlays that limit the occupancy ratio to 70% owner occupied.
- Someone owning more than 10% of the units.
- Delinquent home owner association dues.
- Inadequate reserves.
- Retail space in the condominium building.
- Pending litigation with the Home Owners Association.
- Amount of FHA loans in a condominium building (if you’re using FHA financing).
HUD recommends that before you sign a purchase agreement, make sure your receive and read a copy of the Declarations, Bylaws, Operating Budget, Management Agreement and other important information.
Currently, conventional financing of a condo has a 0.75% price hit if someone is using less than a 25% down payment or is using a mortgage term amortized longer than 15 years. FHA currently does not have a price adjustment that impacts mortgage rates for condos but condos must be on their approved list. If a condo is not on HUD’s approved list and if it meets criteria, it may qualify to be added to the list. There are portfolio lenders who will provide financing for condos, however their mortgage rates tend to be higher since they’re carrying the mortgage.
Here is HUD’s Consumer Fact Sheet for Condominium Projects that I highly recommend you review if you are considering a condo for your next home or investment property.
Something else to keep in mind is that these potential issues may impact you should you decide to refinance your condo or sell your condo in the future. If your Home Owners Association fails to properly manage your building, or events happen that are out of their control, you may find it challenging to find financing in the future.
Here are a few Seattle area condo blogs to check out:
UPDATED OCTOBER 18, 2012.