Condominiums can be an excellent housing choice for people who want to buy an affordable home with less individual responsibility for maintenance, repairs and landscaping.
Buyers who have their heart set on a newly built condo need to be aware of a few steps necessary to get a mortgage to buy it.
The mortgage qualifications for the borrower — down payment, credit score and so on — are “almost identical between a condominium and single-family house,” says Jason Will, vice president, national condominium manager for Wells Fargo Mortgage.
What’s different is that not only the borrower, but also the condominium project itself must receive certain approvals before the lender can approve the borrower’s loan.
As Will explains, “There are different types of project approvals.” There’s one for FHA loans, insured by the Federal Housing Administration. There’s another for VA loans, guaranteed by the U.S. Department of Veteran’s Affairs. There’s a third for conforming loans that lenders can sell to Fannie Mae or Freddie Mac, two secondary-market mortgage corporations. And there’s a fourth for jumbo loans that are for larger-than-typical loan amounts.
The FHA, VA and conforming approvals allow any lender that’s authorized for that type of loan to make loans for that condo project. Jumbo approvals are specific to the lender, rather than open to the marketplace of lenders.
The requirements for a condo project to receive approval differ for different loan types.
“Certain things need to be in place, and it’s a pretty high threshold,” says Dawn Bauman, senior vice president of government affairs at the Community Associations Institute, a Falls Church, Va.-based organization that provides education and information for community associations.
- The percentage of units presold by the builder,
- The percentage of units that will be vacation or rental homes,
- The percentage of units owned by any one investor,
- The percentage of units approved for FHA loans,
- The amounts of money set aside for maintenance and repairs,
- Studies of how much money should be set aside for those purposes,
- Physical and environmental evaluations of the property by licensed engineers and
- Various types of property insurance.
No Approval, No Loan
The concern for buyers is that if a condo project isn’t approved for the type of loan they want, they won’t be able to buy a condo in that project with that type of loan.
“The FHA-insured mortgage could be a more affordable option for them,” Bauman says. “If the project isn’t FHA-certified, the way the process works right now, they can’t get an FHA-insured loan. Period. End of statement.”
It’s possible to buy without an approval, but the buyer’s loan options will be fewer and they should be prepared to make a large down payment, says Malcolm Hollensteiner, director of retail lending sales and production at TD Bank, a banking and mortgage company in Cherry Hill, N.J.
Most builders are eager to gain approvals for FHA, VA and conforming loans and will start early to try to meet the requirements, says Ryan Rosenthal, Pacific division builder manager for Prospect Mortgage, a loan company in Sherman Oaks, Calif.
Still, buyers might have to wait while the developer or builder applies for approval for the type of loan they want.
The wait could be as short as a few days – or it could be several years if the project is in the early stages of construction or the approval process is delayed.
“There is no typical (timeline),” says David Ledford, senior vice president for housing finance and regulatory affairs at the National Association of Home Builders, a trade group in Washington, D.C. “Sometimes it goes very smoothly and quickly and other times it takes longer.”
Some buyers need to coordinate the sale of their current residence or the end of the lease for their rental home to sync up with the completion of their new home.
Either way, they should try to find out the status of the necessary approval for the type of loan they want and condo project where they want to live as soon as possible in the homebuying process.
“Don’t fall in love with a home before you get certain questions answered about how quickly you’re likely to be able to get financing, purchase the unit and move in,” Ledford says.
A realty broker or lender should be able to supply the information.
If the delay is lengthy, the interest rate for the buyer’s financing could change.
“If you’re on the borderline of being able to afford that particular unit, you want to try to protect your risk against that rising interest-rate market,” Will said.
One way to accomplish that is to find a lender that offers an extended rate lock.
All this might sound like a challenge for new construction condo buyers. But in fact, approvals offer major benefits to buyers, as well as developers and lenders.
Will explains, “This whole approval process gives the buyer a couple of levels of confidence.”
With approvals in place, buyers can feel assured that they’ll be able to get financing, that other buyers also will be able to get financing, that the project should be financially stable and that subsequent purchasers will have access to financing when the original buyers decide to sell their units.
Some condo projects fail to get approvals for financing that buyers want. Those situations generally are the exception, not the norm, Will says.
That means buyers who are well-qualified, flexible and patient have a good chance of closing on a new construction condo that fits their needs and that will be their very own new home.