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If you're fond of apartment living but want to own your home, a condo offers the best of both worlds. While buying a condo is similar to purchasing a home in many ways, the process differs in one major way. Your approval for a home loan depends on much more than just your income, down payment and credit record; it also depends on the characteristics of the condo building itself. Here are three things that can affect whether or not a bank will finance your condo purchase.
Owners vs. Investors
Condos are good investments because of the lower maintenance responsibilities, which is why many people purchase them in the first place. However, if a condo building has too many rental units owned by one investor and/or not enough owner-occupied units, Fannie Mae, Freddy Mac, and the Federal Housing Authority (FHA) won't back loans for property in that facility. This means you won't be approved by banks that use their guidelines to qualify buyers.
Fanny Mae and Freddy Mac stipulate at least 50 percent of the condos in a building must be occupied by the owners, and no more than 10 percent of the rental units can be owned by one investor. To be approved by the FHA, a condo must have 50 percent owner-occupied units but up to 50 percent of the units can be owned by one investor.
When shopping for a condo, check to see if the building is approved by one of these entities to ensure you'll be able to secure a home loan when the time comes.
Delinquent Owners
Another thing that can hurt your chances of getting financing for the condo of your dreams is the number of owners who are delinquent on their condo fees. This monthly fee is used to pay for maintenance and other services (e.g. pest control) the condo building may need. When a large number of owners don't pay their fees as agreed, many problems can result.
First, the three government agencies mentioned previously won't approve the building if the delinquency rate is over 15 percent, which means you'll have a hard time getting a loan to finance your purchase.
Second, a high default rate may mean more special assessment fees charged by the condo association so it can pay for required maintenance and repairs, which means higher out-of-pocket costs for you. If the default rate is high and the condo is not requiring owners to pay special assessments to compensate, the property may not be receiving the care it needs to maintain its value, which can hurt you when it comes time to sell or refinance.
When talking to a representative from the condo association about condos for sale, inquire about the delinquency rate and what the association is doing to bring it in line if the rate is too high. It's also a good idea to ask how many special assessments were issued during the previous year to get an idea of how often you'll be expected to fork out extra money to help maintain the building.
Insurance Coverage
Banks and the three loan guarantee agencies want to ensure they'll still get their money if something happens to the condo building. Therefore, they all typically require the condo association to carry some type of insurance that covers the community in case disaster strikes. For example, the FHA requires the condo association carry master insurance that covers 100 percent of the replacement cost of the building.
Unfortunately, some condo associations have begun reducing coverage or eliminating the insurance policy altogether. Not only can this make it difficult for you to get approved for a loan, you may end up losing your investment altogether if something happens to the building that makes it unlivable and the associations doesn't have enough insurance to cover losses.
In addition to asking if the condo is insured, ask to see a copy of the policy. Take this copy to your insurance broker to determine if the association has purchased enough coverage for the building.
For more information about things that can affect your approval for a condo loan or to purchase a place to live, contact a real estate agent.
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