How Does a Condo Mortgage Work?

What Is a Condo Mortgage?

Condo mortgages are home loans that you take out to buy a condominium rather than a single-family home. There are many similarities between mortgages for a home and a condo, and you can finance either type of home with government-backed and conventional loans.

But one important distinction is that with a single-family home, the lender focuses on the home's value and your creditworthiness. With a condo mortgage, the lender also considers the risk associated with the entire condo building or project, rather than just your independent unit.

For example, even if you have excellent credit and a high income, a lender might not offer you a condo mortgage if over 15% of the current condo owners are 60 or more days behind on their condo association or homeowners association (HOA) dues.

Types of Condo Mortgages

You can use the same types of mortgages for buying a home or condo, but different rules and pricing could apply. Some of the common options include:

• FHA loans: The Federal Housing Administration (FHA) backs FHA loans, which can be a good fit for first-time homebuyers who don't have good credit. You can get an FHA loan for a condo in an FHA-approved project—use the FHA's online tool to check a project's status—but there are limited options. For condos that aren't approved, your lender may need to work with the project's HOA to collect information and try to get the single unit you're buying approved.
• VA loans: A VA loan through the Department of Veterans Affairs (VA) may be an option if you're an eligible service member, veteran or family member. Similar to FHA loans, you'll need to see if the project is on the VA-approved list or work with your lender to try to get the individual unit approved.
• USDA loans: Low- to moderate-income homebuyers might qualify for a USDA loan through the U.S. Department of Agriculture to buy a condo in an eligible rural area. Condos that qualify for the other government-backed programs will also qualify for a USDA loan, but you can also use the tool to see if there are any other eligible condos.
• Conventional loans: Conventional mortgages are non-government-backed loans that lenders offer for buying homes and condos. Conforming conventional condo loans, or warrantable loans, align with Fannie Mae or Freddie Mac guidelines. These tend to have slightly higher interest rates than similar conforming loans for single-family homes, but lower rates than non-conforming loans
• Non-conforming loans: Conventional loans that don't conform with Fannie Mae or Freddie Mac guidelines for condo loans are called non-warrantable condo mortgages. Fewer lenders may offer these types of condo loans and they may require a larger down payment or charge more interest than warrantable loans.

What Are the Qualifications for a Condo Mortgage?

Many mortgage qualification requirements are the same for condo and single-family homes. In either case, the specifics can vary depending on the type of loan and lender, but common qualification requirements include:

• Credit score: You'll generally need a credit score of at least 500 for FHA loans (with a 10% down payment), or 620 for a warrantable conventional loan.
• Debt-to-income ratio: Lenders may compare your monthly income and required debt payments to find your debt-to-income ratio (DTI), and a lower DTI can help you qualify for a mortgage. With condo loans, your HOA fees may be included in your monthly payments and affect your eligibility. You might qualify for some condo loans with a DTI up to 50%, but having a lower DTI can help you qualify for more types of loans.
• Down payment: USDA and VA loans don't require a down payment. FHA loans are available with a 3.5% down payment (if you have a credit score of at least a 580). Conventional loans may only require a down payment as low as 3%, but non-conforming loans may require a larger down payment.
• Loan-to-value ratio: Mortgage lenders may have different requirements or interest rates depending on your loan-to-value ratio (LTV)—a comparison of the condo's appraised value and the loan amount. A small down payment will lead to a high LTV and higher interest rate. If you put less than 20% down and your LTV is under 80%, you may also need to pay for mortgage insurance.

The lender may also want to review the condo project and HOA to ensure they meet the requirements for the type of loan you want. For example, Fannie Mae's minimum requirements for an established condo project include:

• The property can't have covenants, conditions or restrictions that split ownership or limit an owner's ability to use the property.
• The residential space has to make up at least 65% of the total space.
• The developer or HOA can't be a named party in a pending lawsuit.
• A single entity can't own more than 20% of all the units if there are 21 or more units in the project, or more than two units if there are five to 20 units total.
• There can't be any critical repairs or significant deferred maintenance.

If the project doesn't meet the requirements, you might not be able to get a conventional loan to buy the condo.

Condo Mortgage vs. Other Mortgages

The most significant differences between condo mortgages and other types of mortgages are:

• Condo loan requirements go beyond the individual borrower and consider the risk associated with the condo project, HOA or individual unit.
• Closing might take longer because of the extra time spent requesting and reviewing information.
• It may be more difficult to qualify for a government-backed mortgage.
• You might receive a higher interest rate on a conventional mortgage for a condo.

Having additional parties involved when buying a home can be frustrating, particularly if you have trouble getting approved because of something that's outside your control. However, these checks could also limit your risk of buying a condo in a project that's poorly run or managed.

Also, even if you wind up with a slightly higher interest rate, that's only part of your monthly cost. Condos tend to be less expensive overall than homes, which means you might be able to put more down or pay less in property taxes. And although you'll have HOA dues, you likely won't need to set aside as much money for home maintenance and repairs.

How to Get a Condo Mortgage

As with getting other types of mortgages, you'll want to think through and compare your options before accepting a loan:

1. Compare the types of condo mortgages. We touched on some of the basic differences between the various types of condo mortgages above. Consider your credit, how much you can afford for a down payment and where you want to buy a home, and then take a closer look at the pros and cons of the various options.
2. Get preapproved. Once you know what type of loan you want, get preapproved for a mortgage to get a more precise idea of how much you can borrow. The lender's preapproval letter can also make you a more compelling bidder (because the seller knows you can likely get the loan), and the letter is often valid for 30 to 90 days.
3. Shop around. You don't have to limit yourself to one lender or bank, so shop around to get preapproved by several lenders and see which offers you the best loan. You can also work with a loan broker who can help you gather and compare loan offers.
4. Find your new home. If you didn't already have a specific condo in mind, keep looking for your new home. You may want to work with a real estate agent who has experience with condos and knows what questions to ask to help ensure the project will qualify for your preferred type of condo loan.

Get Your Credit Ready

Whether you're browsing online or taking serious steps toward buying a home, your credit is going to be important. Improving your credit score may help you qualify for more types of condo mortgages and lower interest rates. You also may want to avoid applying for other types of credit or making large credit card purchases to make sure your credit is ready for a mortgage.

Get your Experian credit report and a FICO^® Score^☉ if you want to see where you're at and monitor your credit for free.