How does a condo mortgage work?

Financing a condominium home is somewhat different than the process of buying a single-family home. For one, a condo mortgage usually comes with higher interest rates, and it can also be more difficult to qualify for, thanks to additional underwriting.

What is a condo?

A condominium — or a “condo,” for short — is typically a more affordable and lower-maintenance alternative to a single-family home. Located within communities of other units, condos are privately owned, but owners share common areas. A key selling point of a condo is that the owner generally only has to take care of the interior of their unit, while a property management company handles the rest.

Condo vs. apartment

Apartments are typically rented by tenants for specific periods of time, whereas condo units are owned by the resident. Additionally, condo owners pay property taxes, whereas landlords pay property taxes on apartment buildings.

In many cases, condo buildings are managed by a homeowners association (HOA), which is responsible for maintenance, amenities and shared spaces, like lobbies, landscaping and elevators. Because tenants don’t own the apartment they live in, they are not part of an HOA.

The last major difference between condos and apartments is financing. Apartment dwellers pay their landlord a monthly fee and never build equity. Condo owners typically finance their purchase with a mortgage, and they generate equity over time as they make their mortgage payments.

Can you finance a condo?

Financing a condo is generally similar to financing a single-family home. You’ll need to save up for a down payment for a condo, for example, and you’ll have to go through the loan application process. In fact, the same type of loans available to single-family homebuyers are available to condo buyers, including conventional loans, FHA loans, VA loans and USDA loans (although there isn’t as much condo housing stock in these markets).

While the loan types are the same, the process of getting the loan varies when you’re looking into buying a condominium.

Condo mortgage vs. other mortgage types

There are a few key differences between a condo mortgage and other mortgage types, including:

• Higher interest rates. You should know that loans for condos usually come with slightly higher interest rates.“Rates are typically higher by 0.125 percent to 0.25 percent,” says Steve Nakash, managing director at FBC Mortgage in Denver, Colorado. “That’s because restrictions or assessments imposed by the property’s homeowners association (HOA) or condo association are out of the borrower’s control, which creates a layer of risk for lenders.”
• Additional documentation. Your lender must obtain additional documents from either the condo association, HOA or management company, as well. These can include a questionnaire form about the condo project, as well as the number of owner-occupied versus tenant-occupied units and how many are owned by one entity. A copy of the condo association’s master insurance policy may also be required. “Essentially, the lender needs to approve both the individual buyer and the condo project for financing,” says Nakash.
• Vetting of the condo project. The condo project itself must be vetted and meet lender standards. For example, current lending guidelines dictate that no more than 15 percent of unit owners can be behind on their condo dues, and one investor can’t own more than 10 percent of the units, according to Jeffrey Loyd, an account executive at Luminaries AI and former principal at Mortgage Acuity. “Lending guidelines don’t allow for condo buildings that allocate more than 35 percent of its square footage to commercial space,” says Loyd. “That’s because lenders think having a big slice of the building’s income sourced from one or more commercial tenants can be risky to them.”
• Insurance requirements: The condo must meet insurance coverage standards and not be a party to litigation that could result in financial loss to the condo association.

In some cases, a full review might be required, which will involve obtaining additional paperwork from the HOA or management company, such as budget reports and a Covenants, Conditions and Restrictions (CC&R) document.

How to get a condo mortgage loan

To improve your chances of getting approved for condo financing and buying a condo, follow these tips:

• Research condo properties carefully. “Make sure you are looking to purchase in a well-run, financially healthy condo association that is predominantly filled with owner-occupants,” says Loyd.
• Explore different financing options and loan types. “Understand the type of loan you are going to pursue so that you’ll know if the project will have to be approved first, such as by the FHA or VA,” says Phillips.
• Save up for your down payment. Putting down a larger down payment for a condo makes you look less risky to lenders, potentially helping you get a better interest rate and increase your approval chances.
• Expect increased closing costs and closing times. “The borrower must pay for documents needed from the condo managing agent, such as the condo questionnaire, condo financial statements and insurance binder for the building as a whole,” says Loyd. “That could set you back a couple of hundred dollars at closing time. Also, because there are additional participants involved in the loan process — such as the condo association and its insurance company — expect longer closing times, often 30 days or more.”

Condo mortgage requirements

To qualify for financing, you must meet specific condo loan requirements for the type of mortgage you’re pursuing. Here’s a breakdown of the different condo mortgage eligibility requirements involved, according to Orlando Miner, principal of Miner Capital Funding in St. Louis.

Conventional loan

• 3 to 5 percent minimum down payment
• 620 minimum credit score
• Debt-to-income (DTI) ratio of no more than 36 percent
• Condo unit must be your primary residence

FHA loan

You can search for FHA-approved condos through the U.S. Department of Housing and Urban Development (HUD) website. The qualifications for an FHA loan include:

• 3.5 percent minimum down payment with a 580 or higher credit score
• DTI ratio of no more than 50 percent
• Condo unit must be your primary residence and meet FHA minimum property requirements

“The FHA will require each project to be reviewed and approved by HUD or a delegated institution,” says Esther Phillips, senior vice president and director of Sales at Chicago-based Key Mortgage Services. “The FHA also has a spot approval process to approve a single unit versus the entire association, but it essentially requires the same amount of information and documentation.”

VA loan

• You must be a military member or veteran or eligible surviving spouse
• No down payment required
• No minimum credit score required
• No maximum DTI ratio; however, you must have other “compensating factors,” such as a higher credit score, if your DTI ratio exceeds 41 percent
• Condo unit must be your primary residence

“The VA has its own approval process, with requirements similar to both FHA and conventional financing,” says Phillips, “but it does not allow for a single-unit approval; the entire project must be reviewed and approved.”

You can search for VA-approved condos in your state through the U.S. Department of Veterans Affairs (VA) search tool. Simply check off “Approved” and then select your state for a list of projects.

USDA loan

• Property must be in a rural location deemed eligible by the U.S. Department of Agriculture (USDA)
• No down payment required
• No minimum credit score required
• DTI ratio of no more than 41 percent
• Condo unit must be your primary residence

Tips for buying a condo

If you are thinking about buying a condo, there are a few important things to keep in mind.

“Condo buying is similar to purchasing any other piece of residential real estate, but it differs in a few key ways,” says Nick Wemyss, a realtor at Intero Real Estate Services.

“For example, there might be restrictions on what interior renovations you can do, and there will certainly be restrictions on exterior modifications,” says Weymyss. If you tour a condo that needs updates, make sure you understand what renovations are allowed before you make an offer.

Because most condos are part of an HOA, Wemyss explains that it’s also important to understand the financial standing of the HOA. Otherwise, you might be surprised with special assessments that can increase the cost of your monthly dues.

Throughout the process of purchasing a condo, working with a real estate agent who specializes in condo sales can give you a big advantage.

“A realtor that has extensive knowledge of condo sales in the area can help buyers make the most informed decision about the unit they are purchasing,” says Weymyss.

Condo mortgage FAQ

• What are the pros and cons of owning a condo?

  A condo can be a more manageable and affordable option compared to a single-family home, especially if you are looking for a starter home. Many condominiums provide on-site security for residences, as well as other benefits like gyms, workspaces and social gathering areas. Some drawbacks to consider include less personal privacy, as you will have to share outdoor and common areas, as well as condo owners association (COA) restrictions and fees.

• Can I refinance my condo mortgage?

  Yes, you can refinance your condo mortgage. It works similarly to a refinance for single-family homes, giving you the option to lower your interest rate or change your loan term. You can also tap into your equity in the condo. One of the main differences between a condo refinance and a traditional home refinance is that the lender must approve the condo’s COA to ensure it is financially sound.

• Can I use a condo mortgage to purchase a vacation or investment property?

  The requirements for a vacation home mortgage vary, depending on the type of loan you have and the condo you buy. For example, you cannot use VA loans or FHA mortgages for vacation homes. You also must check COA rules to ensure that there are no restrictions regarding rentals. Also, because this is a second property, be prepared for a higher down payment requirement and interest rate.