Condo Financing: What You Need To Know (And Free Experts!)
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There are a few challenges to overcome when you want to buy a condo.
You must meet strict qualifications, sometimes pay higher loan costs, and be required to submit specialized documentation.
However, you can prepare for all of this if you know the standards, how the buying process works, and the pitfalls to avoid.
As always, we're here to help you with some advice.
After reading this article, you'll feel like:
OK, maybe not exactly, but at least you'll be armed with knowledge!
To better help you, at the end of this page we will (eventually) list our amazing network of brokers who can answer specific questions about your specific situation and jurisdiction.
If you're a broker and would like to join the Condo.Capital network - contact us here.
Condo Financing: Risky Investment?
Lenders consider condos to be riskier investments because some of their biggest losses come from defaults on condo loans.
This was particularly true during the 2007-2008 housing crash.
Because of this, some lenders don't even offer condo financing at all.
Generally speaking however, for most major lenders condos are eligible for 95 percent financing with insurance.
This means that you only need a 5 percent down payment, but the official numbers depend on your qualifications.
Condo Financing: What You Need to Have
As with all loans, especially mortgages, you must qualify first.
This requires a decent credit score, an good credit report, and steady income.
If you don't meet these requirements, you could end up paying a 25 percent down payment or more. And who has that kind of cash laying around?
Except you Scrooge McDuck!
Have ready your income statements, and understand your credit score before speaking to a broker.
Qualifications for the Condo Association
The homeowners association, or management company, is the corporation that manages the condo building and community.
It also must meet certain qualifications for you to get a mortgage.
In the U.S., Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) set guidelines that many other lenders follow for condo loan approvals.
These include the following:
All planned amenities are finished for developments older than one year.
Borrowers who make less than a 25 percent down payment pay an extra 0.75 percent of the loan at closing or a 0.25 percent higher interest rate.
More than half of the condos have owners.
No one owner can have more than 10 percent of the condos.
Only up to 15 percent of the owners can be delinquent on monthly dues.
In the end, be sure to consult with a local mortgage specialist or broker to discuss your specific situation.
When a lender gives you money to buy a condo, it's not just you they're looking at through things such as your credit score and income, but the condo building as well.
If a condo doesn't meet certain standards, it's considered non-warrantable.
This means that your only financing options are a bank loan or cash. Banks usually require an up to 50 percent down payment and charge slightly higher interest rates for non-warrantable loans.
You can avoid having your heart set on a condo only to be disappointed by asking if the development is approved under Fannie Mae, Freddie Mac, and FHA standards.
For more on these requirements, check our BankRate's great article.
For all our Canadian readers, requirements vary between provinces. As such, the Canadian Mortgage and Housing Corporation (CMHC) put together useful provincial fact sheets for condo buying.
Condo Financing: Additional Requirements
Lenders also take a look at the financial health of the HOA and condo association. They want to ensure that the organization has adequate insurance as well as plenty of budget reserves.
The association must not anticipate special assessments or be tied up in pending lawsuits for which it could pay costly legal fees.
This is why you'll see lenders request specific documents from associations - such as an estoppel or status certificate.
I know, fancy right? Not nearly as exciting as it sounds...
The estoppel or status certificate are legal documents that can include bylaws, proof of the association's insurance, reserve fund details, and contracts.
Although many times the association passes on these costs to you - sometimes hundreds of dollars - but it gives you an overall health statement of your potential new home and the body governing that space.
Money well spent!
Get That Pre-Approval Ready
For new condo buildings, very often you're only buying something on paper, as there is no physical building at the moment.
There's nothing wrong with this, but consider obtaining a bank pre-approval to provide to the builder. Why?
First, this gives you piece of mind that someone will lend you the amount of money you need.
Second, the builder can use this to prove to its lenders that there are in fact qualified buyers for the building's units.
You don't only want a good lending deal, but your builder as well!
The Process of Buying a Condo
After weighing the pros and cons of a condo purchase, you need to establish your condo buying team.
For a detailed description of this process, head over here.
Next, learn more about the condo buildings that you're interested in.
Ask your team members pointed questions about the different buildings you're considering:
- The monthly condo fees?
- How fast have fees risen?
- Are there condo bylaw restrictions such as pets or short-term renting?
- Can you see the association budget?
- Is this an established or up-and-coming area?
- Is this a reputable builder?
- What is the best unit to buy for my budget?
- Can I afford a 2-bedroom unit instead of 1?
- Should I consider a studio?
- What is transportation like in this area?
- Is the city considering future infrastructure in the area?
And so much more.
Another important consideration is insurance.
When buying a condo, your monthly condo fees go toward covering building insurance. However, this doesn't cover your indoor belongings.
So, you need separate insurance coverage to cover personal belongings in case of theft/flood/fire.
Pitfalls to Avoid
There are several things that you should not do when you purchase a condo.
Avoid going into the loan process without pre-approval.
For new condos, make absolutely sure that the builder is reputable by speaking with your team, conducting online research, and speaking with past owners.
Yes, Millennials, you will have to speak with someone face-to-face. But, we assure you it's worth it!
Never choose a condo that isn't located in your desired location. This isn't something you should compromise on.
If you want the downtown lifestyle, don't ever buy in the suburbs - you will be miserable!
Lastly, don't go into the process without a condo buying team behind you. Many of these team slots are at no cost to you such as a local expert, broker, and agent.
Use them! And us! We are all here to help make sure your condo financing and buying process is ...
Looking to connect with a mortgage expert in your area? Contact Condo.Capital below and we will put you in touch with the best-of-the-best to add to your condo buying power team.