Condo building

What Is a Condo Loan and How Does It Work?

TLDR

What You Need To Know

  • Condo loans help prospective buyers finance a condo. They’re similar to single-family home loans, but condo mortgages usually involve extra steps and additional paperwork
  • A condo, or condominium, is a building divided into individually owned units. With condos, you own the unit, and everything outside the unit is owned by the condo HOA
  • Condos are generally considered riskier for lenders to finance than single-family homes because more restrictions come with jointly owned properties

Contents

A condo can be a great option for someone looking to live in an urban area. Condos combine the amenities of a rental apartment complex with the benefits of homeownership. But condos can be trickier to buy and sell because the community you’re purchasing your unit in has a unique set of rules.

If you’re interested in buying a condo, take a look at the guide we’ve put together to help you figure out how to finance a condo, including the types of loans you can get and the pros and cons of owning a condo.

What Is a Condo?

Apartments and condos aren’t interchangeable. There are distinct differences between the two types of residences. A condo, or condominium, is a building divided into individually owned units. With condos, you own the unit, and everything outside the unit is owned by the condo homeowners association (HOA). With apartments, you rent the unit you live in and the entire building (including the unit you occupy) is owned by a landlord or property management company.

Condos are also different from cooperative housing (aka co-ops). Co-op residents buy a share of the corporation that owns the building. They don’t own the individual units they live in.

As a condo owner, you’re responsible for everything inside your unit, like maintenance, repairs or any upgrades. You’re also responsible for following your building’s HOA rules and being a courteous neighbor.

You pay an HOA fee that covers maintenance, repairs and any other responsibilities for everything outside your unit, like hallways, grounds, shared spaces, etc.

How Do Condo Loans Work?

Condo loans help prospective buyers finance a condo. They’re similar to single-family home loans, but condo mortgages usually involve extra steps and additional paperwork.

Condos are generally considered riskier for lenders to finance than single-family homes because more restrictions come with jointly owned properties. To offset the risk, condo loans generally have higher interest rates.

In addition to checking your finances, some of the factors lenders consider while reviewing condo loan applications are:

  • The building’s age and financial health (HOAs typically maintain annual budgets and reserve funds)
  • The structural integrity of the building and the condition of the grounds
  • The amenities

Some of the additional paperwork and information lenders may require from either the condo association (aka the HOA) or the management company include:

  • A completed questionnaire about the condo project
  • The number of units purchased
  • The number of units that are owner-occupied, tenant-occupied or owned by one entity
  • Any lawsuits that involve the condo association
  • The number of unit owners who are delinquent on dues
  • Any upcoming special assessments that may be charged to condo owners
  • Proof of the property’s insurance policy

How you intend to use your condo can also influence the kind of financing you get and how much you put toward the down payment. For example, if you want to purchase a condo as an investment property or as a vacation home or second home, a lender might require a larger down payment.

Types of Condo Loans

The type of condo you want to buy and how you want to use it (a primary residence, a vacation home, etc.) will determine the kind of mortgage you’ll need. No matter which mortgage you choose, you’ll need to provide proof of income and employment.

Here are some of the most common loan types for condos, including their eligibility requirements:

  • Conventional loans: Conventional loans can be offered through traditional mortgage companies or backed by Freddie Mac or Fannie Mae. For most conventional loans, you’ll need a credit score of 620 or higher and, ideally, a debt-to-income (DTI) ratio of 50% or lower. You may be able to make a 3% down payment. Just note that if you make a down payment that’s less than 20%, you’ll have to pay for private mortgage insurance (PMI).
  • Federal Housing Administration (FHA) loans: These government-backed loans are geared toward first-time home buyers who’ll make a down payment that’s less than 20%. For most FHA loans, you’ll need a credit score of 500 or higher and a DTI of 43% or lower. You may qualify for a 3.5% down payment if your credit score is 580 or higher. No matter how much you put down, you’ll have to pay a mortgage insurance premium (MIP).
  • Department of Veterans Affairs (VA) loans: These are government-backed loans for eligible military borrowers and their surviving spouses.[1] For most VA loans, you’ll need a credit score of 580 or higher and, ideally, a DTI of 40% or lower. You may be able to put 0% down. While you won’t have to pay for mortgage insurance, you may have to pay a VA funding fee.
  • U.S. Department of Agriculture (USDA) loans: These are government-backed loans geared toward low-to-moderate income buyers who want to purchase in select rural areas. For most USDA loans, you’ll need a credit score of 640 or higher and a DTI of 41% or lower. There is no down payment required or mortgage insurance but there is an income eligibility requirement and an annual guarantee fee.

Thinking of a Condo Loan? Calculate Your New Monthly Mortgage

Are you unsure how much of a condo loan you can afford monthly? Use our mortgage calculator to start.

Mortgage Calculator

Warrantable vs. Nonwarrantable condos

A warrantable condo can be financed and underwritten using a conventional mortgage that meets requirements laid out by Fannie Mae and Freddie Mac.

Some of the stipulations and criteria are that[2]:

  • At least 50% of the units are owner-occupied rather than investment properties.
  • Commercial space must be 35% or less of the total building square footage.
  • No single entity can own more than 2 units in projects with 5 – 20 units or 20% of units in projects with 21 or more units.
  • At least 85% of the condo units are current or no more than 60 days behind on association dues.
  • The condo HOA isn’t a party in any lawsuits.

If a condo is nonwarrantable (think: doesn’t meet the requirements set by Fannie Mae or Freddie Mac) it can be trickier to buy or sell because nonwarrantable condos are considered riskier than warrantable condos. To buy a nonwarrantable condo, you may have to look for financing options outside of traditional lenders or conventional mortgages.

What Are the Pros and Cons of Buying a Condo?

Like any type of housing, there are benefits and drawbacks to owning a condo. It all depends on your preferences and your financial situation.

Pros of owning a condo

Some of the benefits of owning a condo are:

  • Cheaper than buying a house: Buying a condo is often cheaper than buying a traditional single-family home because you’re paying for a unit in a building instead of an entire property. But this isn’t always the case. A luxury condo in a large city may be more expensive than a house in the suburbs.
  • No exterior property maintenance: You generally don’t have to worry about anything outside your unit because it will be taken care of by the condo HOA. This means no time spent landscaping, shoveling snow or buying equipment to landscape or shovel snow.
  • Access to shared amenities: You may be able to enjoy amenities like courtyards, pools, lounges, recreational centers and more.
  • Around-the-clock security: Some buildings come with 24/7 security, including security guards, gates or keyed entrances.
  • A sense of community: Shared spaces offer lots of opportunities for hallway hellos or courtyard chats. There will be resident events and building owner meetings to attend. And there’s the bonus of knowing that your small community (and building security) is likely keeping an eye on your place while you’re away or traveling.

Cons of owning a condo

Some of the drawbacks of owning a condo are:

  • Restrictions on renovations and lifestyle choices: A condo HOA can set regulations and restrictions that make it difficult to renovate your unit the way you’d want. There may even be restrictions on noise levels and the number of occupants in each unit.
  • Higher monthly fees: HOA dues and shared building expenses can add up quickly and pile up on top of your other monthly expenses, like utilities and insurance.
  • Higher mortgage interest rates: Because lenders consider condo loans higher risk, the loans typically come with higher interest rates, which may make them harder to afford for low-to-moderate income buyers.
  • Harder to sell: It’s harder to sell a condo than a single-family home because of the drawbacks already mentioned on our list.

The Condo Lifestyle Isn’t for Everyone

Get a copy of a condo association’s rules and regulations before you apply for a condo loan. Do your homework on the building and the unit you’re looking at so you know as much as you can going into a purchase agreement. A real estate agent can help you make a decision that’s best for you.

Condo HOAs may also want to interview you to see if you’ll be a good fit in the community.

Condos can be a great option for first-time home buyers who want to live in urban areas or prefer the lower level of commitment and maintenance that comes with condos rather than single-family homes. But the condo lifestyle isn’t for everyone. Make sure it’s a good fit for you.

  1. U.S. Department of Veterans Affairs. “Purchase Loans.” Retrieved March 2022 from https://www.va.gov/housing-assistance/home-loans/loan-types/purchase-loan/

  2. Fannie Mae. “B4-2.1-03, Ineligible Projects (10/07/2020).” Retrieved March 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-2-Project-Standards/Section-B4-2-1-General-Project-Standards/1032993971/B4-2-1-03-Ineligible-Projects-10-07-2020.htm?SearchType=coveo&_ga=2.27544124.1248216186.1648753532-638790037.1642709534

ICYMI

In Case You Missed It

  1. In addition to following your condo HOA’s rules, you’ll also pay an HOA fee that covers maintenance, repairs and other responsibilities outside of your unit

  2. How you intend to use your condo can also influence what kind of financing you get and how much you put toward the down payment

  3. Make sure you get a copy of a condo association’s rules and regulations before you apply for a loan

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