The Not-So-Subtle Differences in Financing a Condo
Spurred by shifting demographics and the unique housing preferences of millennials, the condo market has come roaring back to life in 2014. According to recent data released by CoreLogic, the condo market saw an 11 percent year-over-year increase in condo construction completions. CoreLogic also reported that “condo absorption rates,” a metric determined by how many new units sell within the first three months of completion, has surged from a low of 36 percent during the crash to 82 percent in 2013.
With Millennials preferring a more compact, walkable, transit-oriented lifestyle that is generally found in more densely populated urban centers — where condos are traditionally the primary choice — the condo market is poised to continue strong growth in 2015.
When looking to buy and finance a condo you need to be aware of a few of the subtle and not-so-subtle differences in obtaining your mortgage. In general, condos are more difficult to finance. The reason why is simple: in a traditional single-family purchase, both the borrower and the property must meet underwriting guidelines to qualify. The borrower and the property both still need to meet all the guidelines for a condo purchase, but a third layer of underwriting qualification is added — the project.
It’s that third layer that tends to trip up most potential condo buyers. Fannie Mae, Freddie Mac, and FHA all have some specific guidelines that must be met for them to consider the strength of the project an acceptable risk. Among Fannie Mae’s requirements:
- More than half of the condo units must be owner-occupied.
- No owner may own more than 10 percent of the units.
- No more than 15 percent of owners can be delinquent on condo dues.
- All amenities must be completed if development is more than 12 months old.
- Buyers who make a down payment of less than 25 percent will pay an additional 0.75 percent of the loan amount at the closing or a higher interest rate of about 0.25 percent.
During the crash, these guideline overlays made condos extremely difficult to finance. Many complexes had more than 15 percent of the current ownership delinquent or in foreclosure, and many condo complexes are located in areas that are generally populated with vacation homes and investments, and so could not meet the owner-occupancy requirements.
Another potential pitfall in some markets is obtaining mortgage insurance for down payments of less than 20 percent. Many markets have returned to normalcy, but in some of the states hit harder by the crash such as Florida, Nevada, and California, many mortgage insurers are still reluctant to provide condo mortgage insurance in some cases.
A great place to start your condo search is with your lender. They will help you determine project eligibility BEFORE you jump into a sales contract. FHA and Fannie Mae both have lender accessible databases listing their approved condominium projects. So-called “spot approvals” are also available for projects not listed, but be aware that the process can be time consuming and may not yield a desired result.
Regardless, with the relative price of condos finally dipping below that of comparable single-family residences and continued prospects in steady demand, the 2014 condo market will provide plenty of opportunity for potential buyers.