Condo Mortgages: Differences, Requirements and Rates

Read Time: 6 minutes

Buying a condo is often an excellent choice for people who don’t need the size of a single-family home or simply value convenience. But getting that convenience often means facing a few extra challenges when qualifying for a condo mortgage.

That’s not to say that the additional wrinkles in obtaining a mortgage for a condo will present significant barriers; as long as you’re prepared for them and know what to expect, you should be all right.

Mortgage for Condo vs. Single Family Home 

Getting a mortgage for a condo has several critical differences compared to securing financing for a single-family home. Carefully consider the following hurdles before starting your condo-buying journey.

The Interest Rate May Be Higher

The mortgage rates on condos are usually higher than what the same borrower would pay if purchasing a single-family home on similar terms, varying between 0.25% to 0.75% higher depending on the mortgage type. That’s because condo mortgages are considered somewhat riskier than mortgages for single-family homes.

You can get a lower interest rate with each mortgage type by providing a larger down payment. Of course, that’s often easier said than done, but the potential benefits from doing so can lead to long-term savings.

You May Need a Larger Down Payment

As noted above, you typically need to put at least 25% down on a condo to get the best rates offered on a conventional loan; however, single-family homebuyers can get the best rates by putting down only 20% or less.

To counterbalance larger down payments, condos tend to cost less than single-family homes, so your principal mortgage payment on a condo will likely be lower than it would be on a house. By shouldering a larger down payment during the purchase process, condo owners can enjoy far lower monthly and overall payments over the life of their mortgage. 

Don’t Overlook Association Fees

All condominium developments have homeowners’ associations (HOAs), which are responsible for the upkeep and repairs of the building exteriors, the grounds and any commonly shared facilities. These are funded through dues the condo owners pay each month.

HOA dues can vary widely, depending on the services provided and how costly it is to maintain the overall property. As a rule of thumb, you’ll rarely find that they’re lower than $100 a month, while $500 and above is common for better properties. Also, be aware that association fees are not fixed – they can be raised, sometimes dramatically, if your homeowners’ association decides it is necessary.

While this is an expense that not all homeowners have, your HOA fees will help you save money in other ways. Because the HOA is responsible for maintaining the grounds and exterior repairs, you don’t have to worry about occasional major efforts like a new roof, replacing siding or lawn maintenance. But, you do have to pay for maintaining things that are actually inside your unit, which can often include crucial systems like the furnace and water heater.

How Condo Mortgages Work

When living in a condo, you have a shared interest in your property with the other residents of the development. The HOA bears responsibility for ensuring that the entire development can continue to function as a viable entity. In this regard, a lender will want to ensure that both you and the development are on firm financial footing before it will approve a mortgage.

All loan types and lenders have specific standards that condominium developments and their HOAs must meet before they approve a mortgage to buy a unit there. Typical requirements include that at least half of the units must be owner-occupied and that no single investor can own more than 10% of the units.

Non-Warrantable Condos

Condos not eligible for conventional, VA, FHA or USDA financing are called “non-warrantable”. While they can be tough to get financing for, this doesn’t necessarily mean these are run down or bad places to live—many are high-end, brand-new luxury units. However, the lack of government-backed loan guarantees makes them costly.

Financing for non-warrantable mortgages is often arranged through a local bank or other financial institution with which the buyer has an established relationship. Down payments may be as high as 50% of the purchase price. The loan will usually be an adjustable-rate mortgage (ARM) with a higher interest rate than you would pay for a conventional ARM.

Taking on a non-warrantable condo mortgage is not for the faint of heart, and you should carefully consider your financial situation before making such a commitment. If you have the liquid cash to take on a non-warrantable loan in the first place, you may be better off finding a different property that qualifies under more traditional financing routes, where you can make a larger down payment and enjoy lower monthly payments and interest rates.

Condo Mortgage Requirements

Just like other types of property, each type of conventional and government-backed loan has different qualification requirements for a condo mortgage. Whether you’re going for a conventional, VA, FHA or USDA loan, you should ensure that you meet their minimum requirements before applying. 

Condo Mortgage Requirements
Loan TypeConventional LoanVA MortgageFHA LoanUSDA Loan
Credit Score620 for base rates, but more for premium.No minimum set by the VA, but lenders usually set their own around 620.The FHA requires between 500 and 580 depending on the down payment, but most lenders still require a 620.No minimum set by the USDA, but lenders usually set their own around 640
Down PaymentAt least 20%.Not required.3.5% down payment for a credit score above 580, 10% down payment for credit scores between 500-579.Not required.
EligibilityN/ABorrower must be a qualifying Veteran, active duty or reserve member or surviving military spouse.Condos must be on the FHA’s approved list.Condo must be designated as rural or semi rural by the USDA.
Mortgage InsuranceRequired, unless you make a down payment of over 20%.Not required.Requires a Mortgage Insurance Premium of 1.75% of the loan value, plus annual payments.Not required.
Debt-to-Income Ratio36% and below.43% and below.43% and below.41% and below.
LimitsN/ANo limit if you have full entitlement.FHA loans have limits that vary by county.Borrowers typically can’t make more than 15% of the median amount for the area.
Residence StatusN/AMust intend for the condo to be your primary residence.Must intend for the condo to be your primary residence.Must intend for the condo to be your primary residence.

Refinancing a Condo

After you’ve spent a few years building up equity in your condo, market conditions may have improved, and interest rates may be lower than when you initially purchased. Just like a single-family home, refinancing a condo allows you to tap into your equity and get a lower interest rate. Utilizing a faster loan repayment schedule, you can also refinance to a 15-year mortgage.

While the process of refinancing a condo is pretty straightforward, there are a few key details and standards that differ from a typical refinance, including:

  1. The condo complex must adhere to the relevant insurance guidelines set forth by the loan type.
  2. Your condo unit must have proper title insurance coverage.
  3. Unit owners seeking to refinance must hold undivided ownership or an interest in the land where the condo project is situated.
  4. Unit owners must possess exclusive rights to and ownership of the common areas within their condo units.

Depending on what U.S. state the condo is located in, there may be additional requirements and regulations, such as a limit on how many condos in the complex are allowed to be rented out. Don’t stress about knowing every requirement ahead of time. If you’re interested in refinancing your condo, you should start by consulting with your lender. 

The Bottom Line

Condo mortgages and the process of getting one differ slightly from single-family homes, but you shouldn’t face excessive difficulties if you come prepared. Most importantly, you should ensure that your finances are in order, as the upfront cost may be more than buying a home. Additionally, when you’ve found your dream condo, you should consult with your lender to see if the property conforms to the requirements of your loan type.

Kirk Haverkamp

Kirk Haverkamp is an award-winning reporter and editor with more than 25 years of experience in journalism and public relations. He has contributed to Credit.com, Investopedia, and MetroMode online magazines, among other work. He has a B.A. in English from Hope College and a Master’s Degree in journalism from Michigan State University.

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