5 Challenges Of Financing A Condominium

Condominiums are a popular investment. Compared to a single-family house, they let you live a luxurious lifestyle while not having to worry about maintenance as much. Before looking for a lender, you should be informed of the typical condo financing issues you can have.

Condo living can be for you if you want to experience urban living with opulent amenities and prefer having a management firm handle the upkeep. Additionally, a condo might be a wonderful rental investment.

Due to the authority that comes with living in a HOA community, institutional investors want to purchase real estate there. Each flat or house has one vote inside a homeowners association. As a result, when an investor purchases numerous properties, they amass more HOA shares. More votes will result from this. 

It is simpler for an investor to influence HOA audit and decision-making when they own a significant number of votes. This entails changing the bylaws, expanding the budget, and raising dues. The amount of influence an investor can obtain in a HOA-governed neighborhood is notable when compared to houses in non-HOA communities.

The Challenges of Financing a Condo

Condo financing is more challenging than financing for single-family homes because mortgage lenders scrutinize and assess the finances and operations of the condo in addition to their standard examination of the borrower's creditworthiness. As a result, the procedure takes much longer, and conventional banks normally only offer loans for condos with warrants, not condos without them.

In contrast to single-family residences, a condo requires a questionnaire when you apply for a loan to buy or refinance one. The HOA or management firm fills out the condominium questionnaire.The lender will use the answers to the questions to determine the general health of the condo project. More crucially, the lender can decide whether the condo project is warrantable by looking over the completed questionnaire.

Condos that comply with the standards and regulations of Fannie Mae, Freddie Mac, the Department of Veterans Affairs (VA), or the Federal Housing Administration (FHA) are considered warrantable. Condominiums that don't adhere to the rules are labeled as non-warrantable condos.

As a result, if the condominium is non-warrantable, a borrower might not be able to qualify for a loan from a typical bank even though they have high credit and a low debt-to-income ratio.

There are, however, lenders who focus only on non-warrantable condo loans.

1. Interest rates are higher for condominiums

Mortgage interest rates for condos are often higher than those for single-family homes because condominiums are considered riskier.

As a result, the lender transfers the risk to you by slightly raising mortgage rates.

The interest rate for warrantable condos may be 0.125% to 0.25% higher than rates for single-family homes.

Additionally, the interest rate difference would be much greater if the condo is labeled as non-warrantable; it will normally be between 0.25% and 0.50% higher than rates for single-family residences.

As a result, your debt to income ratio (DTI) rises as a result of the increased interest rate. The proposed carrying costs of your apartment will be added to your loan by the lender when determining your DTI.

The carrying costs for single-family dwellings are "PITI", which is the sum of the interest on principal taxes Insurance.

The carrying costs for condos are "PITIA", which means you sum up the following expenses:

- Interest on principal taxes insurance

- Fees for associations (HOAs or condo associations).

Condominiums typically have greater carrying expenses than single-family residences as a result. Along with the higher interest rate, there is an additional expense "A" for association fees.

2. The condo must be warrantable in order to receive the finest terms

Condo loan financing is available with a minimal 3% down payment through conventional conforming loans. However, you must have a credit score of at least 620 and a DTI that is no more than 43%.

Condominiums must meet stringent requirements in order to be warrantable, including not having the HOA involved in any significant legal disputes, having enough insurance coverage to protect against unforeseen losses, and having enough reserves for replacements and repairs that could jeopardize the soundness, habitability, or safety of the project.

Please be aware that the condo may still be warrantable if there is litigation involving the HOA provided that certain conditions are met (for example, the condo's insurance covers the case).

The ideal down payment for a condo is 3%, but only warrantable condos that have received approval from Fannie Mae or Freddie Mac are eligible for that amount. Otherwise, you might be expected to put down 25% to 30% for non-warrantable condos, which lenders think are significantly riskier.

3. Condominiums without warrants have worse terms

Condominiums frequently fall under the non-warrantable category. If so, you won't have many options for condo financing. Traditional lenders avoid lending on non-warrantable condos because they cannot resell such loans to organizations sponsored by the government.

Instead, the borrower will need to locate an expert lender, sometimes known as a non-QM lender, who is willing to take on the risk of non-warrantable condos.

The maximum LTV is lower for non-warrantable condos than it is for warrantable condos. For instance, non-QM lenders only give a maximum of 70–75% LTV for non–warrantable condos while offering 75–80% LTV for condos with a warranty.

Additionally, as was already said, non-warrantable condos have higher interest rates to account for the risk.

4. Jumbo condo loans must adhere to stringent underwriting criteria

You will have to go through a rigorous underwriting process if you need to buy or refinance a condo with a jumbo loan amount.

Because jumbo loans exceed the Federal Housing Finance Agency's (FHFA) established limits and are not guaranteed by Fannie Mae and Freddie Mac, they are classified as non-conforming loans.

Jumbo loan applications are scrutinized more closely and go through a manual underwriting process rather than an automatic one because they are not supported by government-sponsored organizations.

Jumbo loans with non-warrantable condos carry a twofold increase in risk, necessitating extra stricter processing guidelines.

5. It's challenging to get private mortgage insurance (PMI) for condos

When the down payment for a traditional mortgage loan is less than 20% of the purchase price and the LTV ratio is more than 80%, the lender considers the mortgage to have a higher risk profile and requires the borrower to obtain private mortgage insurance (PMI).

Some insurers have gotten finicky and stopped covering condo mortgages, while others have tightened their policies considerably. In these situations, the lenders can view the mortgage agreement as bad medicine and demand a significant cash down payment for treatment, perhaps as high as 40%.

In contrast, the non-QM lenders providing this product often do not impose PMI for non-warrantable condo loans. Instead, the lender just raises the rate to account for the risk.

The lender must make sure the condo meets a fairly extensive list of standards before approving a condo loan application. In comparison to a single-family home, a condo has a significantly lengthier checklist. The lender won't be allowed to resell your loan on the secondary market if the condo checklist isn't completed.

Despite these obstacles, there are specialised condo lending programmes available for both warrantable and non-warrantable condos. If a traditional lender has turned you down for a condo loan, you can find a different lender who will approve you for a conventional loan (non-conforming rather than conforming).