How to close on a condo: A step-by-step guide

Key takeaways

• Notify your lender as soon as the seller accepts your offer, have all updated financial documents ready to submit immediately and respond to follow-up requests quickly.
• Even a small increase in rates during the 30- to 60-day closing window can add thousands of dollars in interest over the life of the loan.
• If the association has inadequate reserves, too many investor-owned units, active litigation or insufficient insurance coverage, your loan can be denied regardless of your credit score or income.

The seller accepted your offer on a condo. Now the real work begins.

The period between an accepted offer and closing day is when your lender verifies everything, the title is cleared and the terms of the loan are finalized. This process typically takes 30 to 60 days, and delays are common when buyers are slow to provide documents or do not follow up with the professionals handling the transaction.

Notify your lender as soon as the seller accepts your offer so underwriting can begin immediately. The faster you start, the less likely a documentation issue or scheduling delay will push back your closing date.

Here is what to expect and what to do at each step.

Underwriting is the lender's final review of your finances. The lender will verify that you have the income, assets and credit standing to close on the home and make the monthly payments. If you went through pre-approval, you have already provided most of this information once. This round goes deeper, and some documents will need to be updated.

Have the following ready to submit:

• Bank statements from the past two to three months
• Updated pay stubs covering the most recent 30-day period
• A new W-2, if a new tax year has started since your pre-approval
• New tax returns, if applicable
• Updated statements from investment and retirement accounts
• A signed copy of the purchase agreement
• Proof and verification of any other assets, such as a second savings account or property you own
• Proof you have not taken on additional debt since your pre-approval
• A gift letter, if you are receiving funds from family or friends, confirming the money is a gift and not a loan
• Proof you have paid rent on time for the past 12 months, either through bank statements or a letter from your landlord. Rental payments are not included on credit reports unless you miss a payment.
• Proof you have cash reserves sufficient to cover emergency repairs if necessary

Respond to any follow-up requests from the lender quickly. Underwriting is the stage where delays most often originate, and they are almost always caused by missing or outdated documentation.

During this period, avoid making large purchases, opening new credit accounts, changing jobs or moving large sums of money between accounts without consulting your lender first. Any significant change to your financial profile can trigger additional review or jeopardize your approval.

A lot of time can pass between making an offer and closing on a home. Interest rates can move during that window, and even a small increase can add thousands of dollars in interest over the life of the loan. Locking your rate protects you from that risk.

When you talk to your lender about a rate lock, ask:

• Whether a rate lock is available and at what rate
• How long the lock lasts before it expires, typically 30 to 60 days
• Whether the lender charges a fee for the lock and how much
• Whether you can buy a "float down" option, which allows you to take advantage of a lower rate if rates decrease before closing
• What it costs to extend the lock if your closing is delayed beyond the expiration date

A rate lock is especially important in a rising rate environment. If your closing is delayed and the lock expires, you may be forced to accept a higher rate or pay for an extension. Ask your lender to walk you through both scenarios so you understand the financial impact before you commit.

A title search examines the chain of ownership of the property to make sure there are no overlooked liens, claims or legal issues that could affect the transfer. Either you or the seller hires the title company, depending on what is negotiated in the purchase agreement and local requirements.

If you are responsible for hiring the title company:

• Ask your real estate agent for a recommendation. Agents work with title companies regularly and can point you to ones with a track record of completing searches on time.
• Verify the company's credentials and reputation through an online search and reviews.
• Follow up with the title company once the search is ordered to track its progress. Title issues can delay a closing, and early follow-up gives you time to address problems.
• Ask about the cost of a lender's title insurance policy, which your lender will require. This protects the lender against title defects discovered after closing.
• Ask about the cost of an owner's title insurance policy, which protects you. It is optional but strongly recommended. A title defect that surfaces years after closing, such as a previously unknown heir with a claim to the property or an unreleased lien, can be expensive to resolve without coverage.
• Consult a real estate attorney if the title report turns up any issues, such as back tax liens, unresolved judgments or easements that affect the property.
• Ask the seller to resolve any liens or encumbrances that appear on the title before closing. Most purchase agreements require the seller to deliver clear title.

Your lender will order an appraisal to confirm that the condo is worth at least as much as the loan amount. The appraiser evaluates the unit's size, condition, location and recent sales of comparable units in the building or neighborhood.

If the appraisal comes in at or above the purchase price, the process moves forward. If it comes in below the purchase price, you have several options:

• Negotiate with the seller to lower the price to match the appraised value.
• Pay the difference between the appraised value and the purchase price out of pocket.
• Challenge the appraisal by providing additional comparable sales data to the lender.
• Walk away from the deal if your contract includes an appraisal contingency.

Your real estate agent can advise you on which option makes the most sense given the market and the size of the gap.

Financing a condo is not identical to financing a single-family home. Lenders evaluate the financial health and governance of the condo association in addition to the borrower's qualifications. If the association does not meet the lender's standards, the loan may be denied regardless of your creditworthiness.

Factors lenders typically review include the percentage of units that are owner-occupied versus rented, whether the association is involved in any active litigation, whether the reserve fund is adequately funded, whether any single entity owns a disproportionate share of the units and whether the association's insurance coverage meets minimum requirements.

The vast majority of condominium communities — 82% — have underfunded reserve funds, defined as less than 70% of the cash on hand for projected repairs, according to Association Reserves, a Westlake Village, California, firm that financially evaluates HOAs. The number, from 2022 to 2023 is up from 73% in 2010 to 2012 and is the highest underfunding rate recorded by the firm. Inflation is to blame, Association Reserves said.

For conventional loans backed by Fannie Mae or Freddie Mac, the condo project must be on the lender's approved list or go through a project review. FHA loans have their own approval process. Ask your lender early in the process whether the condo project is approved for the type of financing you are using. If it is not, your options may be limited to portfolio lenders or other nonconventional loan products, which can carry different terms and rates.

There are several ways to obtain an HOA’s insurance information. You can contact the HOA’s management and ask for the master insurance declarations page. It shows property limits, liability insurance limits, how common areas are covered and when the policy expires. You can also ask for the HOA insurance agent’s contact information. They can explain any parts of the policy that you don’t understand.

Some HOAs have member portals that post insurance information. They also may include policy updates, premium notices and any changes to the master policy.

There are several key areas to an insurance policy, according to American Tri-Star Insurance Services, an insurance agency based in Huntington Beach, California. Look for:

• Type of policy: Some HOA insurance policies are what is called bare walls — they only cover the outer shell of the building, and fixtures and personal property inside your unit are your responsibility. A single entity covers your unit’s built-in fixtures. An all-in policy covers almost everything inside your unit except for your personal belongings.
• Coverage limits: How much does the policy pay for liability and property?
• Deductibles: You may need additional insurance to cover any gaps that the policy has.
• Special assessments: HOAs can levy special assessments to pay for large claims. Your personal insurance may pay for these.
• Expiration date: Make sure the policy is active.

Once underwriting is complete, the rate is locked, the title is clear and the appraisal is satisfactory, your lender will issue a closing disclosure at least three business days before closing. This document outlines the final loan terms, monthly payment, interest rate and all closing costs.

Review the closing disclosure carefully and compare it to the loan estimate you received when you applied. If any numbers have changed significantly, ask your lender to explain why before you arrive at the closing table.

On closing day, bring a government-issued photo ID and a cashier's check or wire transfer for the amount due at closing, which includes your down payment and closing costs minus any earnest money already deposited. Your real estate agent or closing attorney will walk you through the paperwork, which typically takes one to two hours.

Once everything is signed and the funds are transferred, the title is recorded and the condo is yours.

More on this topic:

• Getting a mortgage pre-qualification or pre-approval for a condo purchase
• How to assess your financial readiness to buy a condo
• How to know if you can afford a condo: A checklist
• How to hunt for a condo to buy
• 10 terms to know before buying a condo