What to Know About Down Payments When Buying a Condominium

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You can use the same loan programs for condos that are used to buy single-family homes. But some key differences could impact how much of a down payment you’ll have to come up with if you’re considering a condo purchase.

Condo Downpayment Basics

Down payment requirements for a condo should be similar to those for a single-family home. The key word here is “should” because many condo developments across the country might not qualify for mortgage types insured by the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA).

That means condo buyers may resort to Fannie Mae and Freddie Mac loans instead.

Condo mortgages tend to have higher interest rates than loans for single-family homes because Fannie Mae and Freddie Mac view condos as riskier bets. To hedge that risk, they change the lender an extra fee if you’re buying a condo and your loan-to-value (LTV) ratio is over a certain limit.

Previously, LTV ratios greater than 75% would trigger this fee, but as of May 1, 2023, the cutoff is 60%. Lenders typically pass this fee on to buyers by charging slightly increasing their interest rates.

For example, a 75% LTV value on a $400,000 loan is $300,000. Anything above that triggered the higher interest rate under the old rules. With a 60% LTV value, that trigger is $240,000.

Depending on your circumstances and the type of loan you qualify for, you may be able to put as little as 3% down on the condo’s purchase price, but 10% is the norm for those buyers who must rely on conventional loans to finance their units. Another possibility, if you qualify, is to apply for a VA loan which doesn’t require any downpayment.

But if the condo unit you want to buy is not approved for FHA or VA financing, you won’t be able to take advantage of the low-down-payment options these loan types offer.

One question often arises is how much money you should have before buying a condo. The short answer is that it depends on the total monthly costs and the type of condo mortgage you choose.

If you qualify for a VA loan, you likely won’t need a down payment, but you’ll still need enough cash to cover your closing costs and funding fee unless you roll the fee into your loan.

With conventional mortgages, a lender will probably require you to have a certain amount of cash reserves set aside in case of an emergency. How much? It varies by lender, but most want to see a reserve of up to 12 months of monthly payments on the loan. 

Why is Financing a Condo More Complicated?

Qualifying for a condo loan is more complicated than a single-family home loan because you’re not only buying a condo, you’re also buying into a condo community. You’ll be subject to a specific set of rules and fees, and a lender will consider your finances and the condo community’s finances as part of the underwriting process.

Condos are typically managed by an association responsible for maintaining and repairing common areas like hallways, roofs, garages, and recreation facilities. The association also has the power to adopt and enforce guidelines for the use of those common areas, and residents pay monthly or yearly dues to cover these costs.

Lenders will assess the entire condo community, including:

  • Number of units 
  • Number of units owned by investors that are not owner-occupied
  • Recreation and common area amenities
  • Pending litigation involving the condo association
  • How many owners are delinquent on dues and assessments
  • Deferred and upcoming special assessments

These variables make a condo either warrantable or non-warrantable. A warrantable condo is eligible for a conventional loan under Fannie Mae and Freddie Mac rules.

Leaders want to ensure mortgages issued for condos are a reasonable risk, so most mortgages require that your condo be warrantable.

A non-warrantable condo doesn’t follow Fannie and Freddie’s rules, which means that you can’t use conventional financing to buy it.

Financing a non-warrantable condo will likely be more difficult, as you won’t be able to access the low-down-payment options offered by some traditional mortgage programs, and you’ll be limited to a smaller pool of potential lenders.

To determine if a condo is warrantable, you can see if it appears on approved lists like those published by the U.S. Department of Housing and Urban Development or the U.S. Department of Veterans Affairs. Some areas have limited condos approved by Fannie Mae, Freddie Mac, the FHA, or the VA, so your down payment options might be even more limited depending on where you want to buy a condo.

Many condominium complex associations don’t pursue FHA or VA certification because the regulations and documentation processes are challenging.

Also, if you’re purchasing a condo as a second home or investment property, you can expect to pay higher interest rates due to fees charged by Fannie Mae and Freddie Mac, ranging from 1.125% to 4.125% of your loan amount, depending on your LTV. However, you can negotiate your mortgage rate with a lender, and the larger the down payment you make, the less you’ll pay in extra fees or higher interest rates.

Conventional condo mortgages don’t always come with higher down payments. If you must apply for a conventional loan not guaranteed by Fannie Mae or Freddie Mac, you may not have to put down a 20-25% down payment.

A down payment often depends on several factors, such as your credit score and the make-up of the condo development where you want to buy.

For example, lenders might want a larger down payment if you’re buying into a development with more renters because the perception is that a rented unit won’t be as well maintained as an owner-occupied unit, creating more risk to the entire condo community. Most lenders prefer condo developments with 80% or more of the units occupied by owners, not renters.

Your lender will usually perform an association budget review if you have a high LTV, which is the case with a low down payment. The budget review might also be necessary if you buy a condo as an investment property.

Your lender will contact the condo association to help furnish the appropriate documentation for the review.

Types of Condo Mortgages

Conventional loans offer condo financing with as little as 3% down, a minimum 620 credit score and cancelable private mortgage insurance (PMI). Lenders use guidelines set by Fannie Mae and Freddie Mac, which means the condo you want to buy must be warrantable.

FHA loans typically require a credit score of at least 580 and a minimum 3.5% down payment. If you’re interested in buying a condo financed with an FHA loan, you should check to see if the condo you’re interested in is FHA-approved using HUD’s condominiums database.

Enter your search terms and select “approved” from the status list to generate an FHA-approved condo list. This list can help you locate nearby FHA-approved homes or tell you if a condo you’re interested in is FHA-approved.

Fannie Mae or Freddie Mac loans are available in some instances. You can also search for condo developments in your state approved for conventional loans guaranteed by Fannie Mae or Freddie Mac. using the Fannie Mae database of approved condo developments.

VA loans are an attractive option for active-duty service members, veterans, and eligible spouses. VA loans have a 0% down payment requirement, no mortgage insurance, and no loan limits.

The VA also has a VA-approved condominium list to help buyers determine if they can use a VA loan.

USDA loans offer a 0% down payment mortgage to low-income condo borrowers in rural areas. There’s no minimum credit score requirement, but you must meet USDA income limits and demonstrate you can handle the monthly mortgage payments.

The USDA’s property eligibility tool can help you find condos near you that you might qualify for.

Requirements For Buying a New Condo

If you want to buy a new condo, lenders often require that the entire complex is finished before anyone can get a mortgage to minimize risks. If the condos are slated to be completed in phases, some lenders require that the most recent phase of construction must be complete.

Others are only worried about the completion of the building that the unit is in.

Many people buy a condo for the communal spaces and a maintenance-free lifestyle funded by dues collected by the condo association. Most lenders require that condo complexes be 75% to 90% sold and occupied in the builder presale before approving mortgage financing.

This requirement is sometimes waived depending on the lender.

There are also limits on how many units can be owned by one person or entity. This mitigates risk so the association doesn’t miss out on funding if a multiple-unit owner can’t meet a dues obligation.

A lender will review the condo bylaws to ensure there aren’t any restrictions that would unreasonably prevent a buyer from paying off a loan (i.e., restrictions on a sale) and check for any pending legal issues involving the builder or the association.

The loan can’t be approved if there’s any litigation involving safety issues.

Tips for Financing and Buying a Condo

Hire a real estate professional. Work with a real estate agent or attorney experienced with searching for and buying condos. You’ll need help reviewing condo association documents, bylaws, recent regulations, and budgets to help you fully understand issues that may impact your decision to purchase or affect your lifestyle if you do.

Research the condo association. Make sure you do your due diligence regarding the condo association management company. Meet the association president, board members and current residents if possible, and be sure to ask if the association has been involved in any lawsuits or has experienced excessive delinquencies.

Ask about special assessments implemented to cover a large expense (i.e., roof repairs, water damage, etc.) and the current occupancy rates.

Are the amenities compatible with your lifestyle? A pool and clubhouse are great to have access to, but only if you intend to use them.

Are they worth the price tag? Comparing amenities can help you narrow your search, and lenders will want to know what amenities the condo community has when making their evaluation.

What are the rules about rentals?  Be sure you fully understand association rules about rentals if you’re thinking about using your purchase to create passive income. It’s also good to know what other owners can do with their units, even if renting is not part of your plan.

What are the other costs for the condo community?  How much will you need to pay monthly for condo insurance, association dues, property taxes, mortgage insurance, and your principal and interest payments?

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