Cover story: Lenders look differently at condos, houses
As a prospective homebuyer meeting with a lender, don’t be surprised if the lender asks whether you are considering buying a condominium. While condo financing is not always necessarily more difficult to obtain than a mortgage for a town home or a single-family home, there are some differences.
“The main difference when you are applying for a mortgage for a condominium is that it’s not just you that’s being evaluated, it’s you and the condo building,” said Dominic Turano, sales manager of First Home Mortgage in the District.
While the credit qualifications are similar for condo owners and other buyers, one difference, said Rob Clark, a senior loan officer with PHH Home Loans in Alexandria, is that the condominium fee must be included in the buyer’s debt-to-income ratio.
“Some buyers say they think they can only afford a condo, but if the condo fee is $500 per month on a $200,000 condo, they may be able to afford a $275,000 or $295,000 home that doesn’t have a homeowners association fee because the monthly payment would be about the same,” Mr. Clark said. “It’s fine if they want to buy a condo for other reasons, but I think people need to be aware of the difference a condo fee can make in the housing payment.”
If your credit qualifications are excellent and your debt-to-income ratio is low, you may be surprised to find your loan still could be declined because of the risk associated with the condominium association where you want to live.
Condominiums essentially involve group ownership of property, so the management of the association must be reviewed to make sure the investment is not too risky. The qualification rules are different depending on whether FHA or conventional financing is chosen.
“As a starting point, condo buyers and their lenders can check the list that [the Department of Housing and Urban Development] has of condos approved for FHA loans,” said Kevin Quaid, branch manager with the Fitzgerald Financial Group, a division of Monarch Bank in Alexandria.
“While being on the FHA approval list helps, it doesn’t mean that lenders can automatically approve a loan,” he said. “Condo developments evolve daily, so lenders will need to send a questionnaire to the condo management to make sure it still meets FHA requirements.”
The major requirements for an FHA condo loan approval include:
• The number of rental units must be below 50 percent of the total number of units.
• The number of homeowners delinquent on their condo fees must be less than 15 percent.
• No one owner may own more than 10 percent of the units in the condo.
• At least 10 percent of the condo fees must be held for cash reserves.
• There must not be outstanding lawsuits against the condo association.
“Condominium approvals for an FHA loan are up for renewal every two years, but even in between the renewal dates, lenders are required to check on the health of the condo association,” Mr. Clark said.