Condominiums and townhomes are a great option when it comes to homeownership. They can be great as starter homes, for those looking to downsize, or even those looking to be in a specific location close to urban areas, parks, or schools.
What many homebuyers do not realize when purchasing a condo is that the underwriting process is different than when purchasing a single family detached residence.
While you have to go through the same credit and income underwriting process, just like for any other conventional mortgage loan, there is additional documentation surrounding the HOA that is also required. This includes a review about the association, financial statements, and insurance coverage and a required questionnaire.
Why does this matter?
When you purchase a condo or townhome, you are purchasing the ownership interest in your specific unit and a share of the common space. The HOA oversees all of the common areas and are responsible for maintaining and insuring the building.
How do I know if the HOA that I am interested in is approved for financing?
The Federal Housing Administration (FHA) and Veterans Administration (VA) have processes to approve condo complexes. In order to obtain an FHA or VA loan, the complex must be approved by these respective agencies. You can search FHA-approved condos here and VA-approved condos here.
An FHA or VA loan can not be financed on a condo or townhome, if the complex is not approved. A big difference between FHA and VA condo approvals is that FHA approvals expire whereas VA approvals do not. An HOA would have to recertify their condo complex every three years whereas they will remain VA-approved assuming they do not alter their governing documents.
Fannie Mae & Freddie Mac have their condo approval processes as well but they do not have a client-facing portal to check. You can, however, always ask your lender if the complex is approved. These approvals expire after 18 months. It is important to note that even if the complex is listed as approved, lenders still need to underwrite the HOA and confirm it still meets Fannie Mae/Freddie Mac standards.
What if a condo complex is not approved by Fannie Mae, Freddie Mac, FHA, or VA?
In the event that a property is not approved by one of the agencies (typically due to lackluster financials or mismanagement by the HOA), there are non-warrantable condo financing programs. Non-warrantable mortgage loan programs will offer more flexibility when it comes to HOA reserves, mixed-use properties, investor concentration, and sometimes even pending litigation with the HOA. These programs tend to feature a higher interest rate as a result.
If you have any questions, please feel free to reach out to discuss with one of our Mortgage Loan Originators at (760) 930-0569.
