Are you wondering what kind of home you can afford? These condo financing tips will help you purchase the home you deserve.
American cities are trading single-family homes for smart growth-friendly mixed-use condominium buildings. Condos allow for the comfort and luxury of a house while also giving condo owners the ability to reduce their impact on the environment. On top of all that, mixed-use condos allow for easy access to stores and local amenities!
Sold on buying a condo but not sure how condo financing works? We've got you covered. Read on to learn all about it!
1. Condo Financing is Different
It might come as a surprise, but financing a condo comes with different complexities than financing a single-family home. This is due in large part to the fact that you do not own the building where the condo is.
With single-family homes, you have total control over both the interior and exterior of the home, as well as the land on which it sits. The condo association manages the exterior of a condo, including the building, amenities, and grounds. This means that lenders don't need to look at your finances, they have to look at the finances of the entire condo association.
If a significant number of condo owners are delinquent on their payments, or if there are other financial issues with the property, then a lender may decline to fund a loan for that specific property.
2. Mortgage Options
There are several different types of loans you can take out to finance a condo apart from a conventional mortgage. The primary alternative to a conventional mortgage is a Federal Housing Authority loan. FHA loans are desirable to a lot of buyers because down payments can be as low as 3.5% of the purchase price, and the credit requirements are less rigid.
FHA loans come with more stringent rules for buyers looking to purchase a condo. The FHA maintains a list of condos that have been pre-approved for mortgages, but if the condo you're looking for isn't on the list, you still have some ways to qualify for FHA loans.
The FHA will approve a single unit within a condo association if it meets specific requirements. In complexes with 10 or more units, less than 10% of the other condos may be FHA-insured, and the condo you're looking at must be your primary residence and not a vacation home. At least 80% of the FHA loans in the complex, and 50% of the units in the complex overall, must be owner-occupied.
Finally, construction must have been completed on the complex for at least a year with no additional construction pending.
3. Go Conventional
If you want to avoid the additional restrictions that come with FHA loans, then you should opt for a conventional mortgage. Conventional lenders have rules for financing a condo as well, but they are less restrictive than FHA rules.
As mentioned before, the lender is going to look at delinquencies across the entire complex in terms of HOA dues. At least 85% of HOA dues must be current at the time of purchase. The lender is also going to check to see if there is any type of pending litigation against the complex.
Some condo associations have covenants by which the buyer must abide. Some lenders are okay with restrictions, but other lenders may require that the purchase is without restrictions. Finally, the lender will make sure that the property has appropriate insurance.
If you want to make the approval process a little easier, ask if the condo association has any preferred lenders. For example, The Westerly works with Bank of America, Wells Fargo, Citibank, and First Republic Bank. Working with preferred lenders speeds up the buying process and helps ensure that all condo owners in the association meet the minimum standards set by Fannie Mae or Freddie Mac.
4. Check Your Credit
Before you apply for a loan, you want to make sure that your credit is in tip-top shape. You should examine your credit and plan for buying your condo far in advance of your loan application.
In the year before you apply for your loan, reduce your debt-to-income ratio as much as possible by paying down credit cards. You'll also want to nix any applications for new credit cards or other loans. If you have too many inquiries on your credit, your lender might see this as a sign that you need credit and may decline your application or give you a higher interest rate.
5. Have a Healthy Down Payment
Everyone knows that you must have a down payment to buy a home or condo, but how much of a down payment do you need? Ideally, you'll have at least 20% of the home's price to put down as a down payment for the condo. If you don't have 20% to put down, that doesn't mean that you're out of luck, though.
Lenders will approve loans for buyers who don't have a sufficient down payment with the requirement that they take out private mortgage insurance and pay on it until you have at least 20% equity in the condo.
6. Get Pre-Approved
If you want to cut out part of the stress of buying a condo, then you should seek out pre-approval for a mortgage before you start shopping. Lenders will look at your credit and income and determine how big of a mortgage you qualify for. This isn't only a stress saver, it'll help guide your search for a new condo because you'll know exactly what price range to shop in.
Ready to Find Your Dream Condo?
Condo financing is different from financing a single-family home, but that doesn't mean that it's not worth the effort. In the end, you'll have a fantastic home in which you'll be able to live your best life. Happy condo hunting!
Looking for a high-end condo near the beach in San Francisco? Look no further! Contact us today to see how we can help you finance the condo of your dreams.