SHARE

Condo Mortgages: What You Need to Know Before Financing a Condo

Purchasing a condominium is a home purchase; however, condo financing differs from conventional single-family home mortgages. Buying a condominium comes with its own set of rules and fees.

From requiring you to follow extra steps in underwriting to boasting specific rules in particular programs, novices stepping into the world of purchasing a condo need to take time to learn more about mortgages. Buyers should consider the ins and outs of condo living before applying for the mortgage.

Here we take a closer look at what condo mortgages are and why they cost higher.

What is a Condo Mortgage?

Scoring a mortgage to purchase a condo is a lot different than obtaining a loan to buy a single-family home. Typically, condominium loans boast stricter requirements alongside higher price tags on standalone single-family dwellings.

It is primarily because the value of a condo is subject to many additional risk factors that are not under the borrower's control. Fannie Mae and Freddie Mac ask borrowers to meet higher eligibility standards on condo loans to mitigate the risks.

Why are Condo Mortgage Rates and Down Payments Higher?

If you're planning to buy a condo, it's a good idea to familiarize yourself with rates and down payments. Let's take a closer look at why mortgage rates and down payments are higher for condos.

Higher Mortgage Rates

Mortgage rates for purchasing a condo are typically higher than on single-family homes. Even if a borrower purchases them on similar terms, condominium mortgage rates exceed conventional mortgages due to condo mortgages being riskier.

Typically, on mortgages that Fannie Mae backs up, the rate on a condo may vary from 0.125-0.250% (one-eighth to one-quarter percent) higher than what you'd pay on single-family homes. Fannie Mae requires lenders to pay an upfront fee of 0.75% of the total loan amount. Here lenders may boost the mortgage rate to cover this fee.

Moreover, borrowers may avoid higher rates by paying the total upfront fee or making down payments totaling up to 25% of the home's purchase price. Unfortunately, condo buyers may find it challenging to score larger down payments, especially if they're novices.

However, if you choose an FHA loan, you may make a smaller down payment of around 3.5% while paying rates similar to when you would pay with larger down payments. The drawback here is that FHA also charges an upfront mortgage insurance fee comprising 1.75% of the total amount, which Fannie Mae loans don't charge.

In addition to this, you'll learn that specific lenders charge higher mortgage rates in different states. Generally, the difference isn't that noticeable. However, you'll find that some states charge half a percent more than other states.

Larger Down Payments

Here's the thing: to enjoy the best rates on Fannie Mae loans, borrowers need to offer at least 25% down on condominiums. On the flip side, homebuyers can get their hands on fantastic rates if they put down less than 20 percent.

Apart from that, specific lenders require borrowers to put down a minimum of 20 percent. However, this may vary from state to state – Florida and Nevada are known for the highest requirements. Some states allow you to enjoy down payments as low as 5% alongside stellar credits.

Moreover, FHA loans ensure down payments as low as 3.5 percent. However, you may still have to put down 10% if you're purchasing a condominium in areas that are newer but lack warranties of 10 years.

Warrantable Condo vs. Non-Warrantable Condos

Typically homeowners utilize 'conforming' mortgage financing, which means that they're acquiring their loan from government-sponsored entities, Fannie Mae and Freddie Mac. It also indicates that their loan meets both groups' minimum standards.

Fannie Mae and Freddie Mac use 'warrantable' to classify the different condo projects and properties against which they'll provide a mortgage. On the flip side, the term 'non-warrantable' refers to Condo projects and properties that fail to meet Fannie Mae and Freddie's Mac warrantable standards. Let's discuss what classifies as warrantable and non-warrantable.

Warrantable Condos

Fannie Mae and Freddie Mac consider condos warrantable if:

  • No person owns more than:
    1. 2-4 unit project- 1 unit
    2. 5-20 unit project- 2 units
    3. 21 and higher units: 20% of units (Fannie Mae) or 25% of the units (Freddie Mac)
  • If the unit is detached, i.e., it does not share walls with other units while still classifying as a condo
  • Commercial space accounts for at least 35% or less of the property's total square footage
  • HOA (Homeowners Association) is not present in any lawsuits.

Non-Warrantable Condos

Condos are considered non-warrantable if:

  • A project is incomplete
  • The developer has not turned over controls of the HOA to owners
  • One person owns more than 10% of all units
  • The community offers short-term rentals
  • The majority are rented to non-owners

Pay Attention to Fees and Insurance

Condos are an excellent investment; however, you must understand the hidden costs of buying one:

While condos promise a maintenance-free life, Home Owner's Association (HOA) or Property Owner’s Association (POA) charge condo owners a monthly, quarterly, or annual fee to cover the property's maintenance. These fees can sometimes increase monthly mortgages up to $500 per month and more!

Condo owners may have to deal with special assessments on top of mortgage payments, HOA dues, property taxes, and insurance. Special reviews refer to extra privileges that HOA requires to cover any unplanned expenses that may occur.

Luxury condos present alongside the beachfront offer fantastic aesthetic appeal. However, these homes usually require homeowners to pay an additional cost.

Final Words

Today, more and more people are purchasing condos, from retirees to investors. It's no surprise that condos are growing in popularity for their benefits; ensuring you can enjoy a maintenance-free life and offering you the opportunity to build a community. You can even benefit from excellent amenities like fitness facilities, pools, spas, and even cafes!

While condo mortgage rates are different from single-family home loans, there are ways you can score fantastic interest rates. Make sure you spend some time contemplating other condos in various states before making your final purchase.

 

Ready to Buy a Condo? Apply Today!

All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022