Condo Mortgages - What You Need To Know About Financing A Condominium

Mortgages for condominiums are more complicated than mortgages for single family homes and PUDs.  The reason for this is the condominium must be underwritten in addition to the borrower.  When a buyer purchases a single family home, the lender underwrites the borrower and reviews the appraisal, title, and insurances.  When a buyer purchases a condo, the lender underwrites the borrower, appraisal, title and insurances; but also underwrites the condominium.  The level of scrutiny of the condo review process depends on several factors, including: your down payment, occupancy type, and loan type (conventional Fannie Mae/Freddie Mac, FHA, VA, Portfolio, Non-Warrantable).  What many buyers fail to understand is that this condo review process is performed independently from the review of their credit profile. 

If the condominium is not approved, the mortgage is denied; regardless of the stand alone strength of the buyer’s credit profile.  As a result, many highly qualified borrowers assume that their Condominium Mortgage will get approved because of their individual strength.  Since Condominiums are underwritten independently, many of these loans end up denied because the buyer did not focus on selecting a lender to work with that is highly experienced in approving condo loans.  In addition, it is imperative that the lender has multiple condo approval options:  Limited Review, Full Review, or Non-Warrantable Condo Review; & offers multiple Condominium Mortgage Approval channels: Conventional Fannie & Freddie, FHA, VA, Jumbo, and importantly- Portfolio loan program options.

Foundation Mortgage is a boutique direct lender that has been a leader in the condo mortgage financing market since 1998.  Our corporate headquarters is located in Miami Beach, Florida; one of the most diverse and complicated condominium markets in the county.  Over the past 18 years we have developed a unique understanding of Condominium Mortgage Financing and are able to lend on many projects other banks deny.  We specialize in loan fallout from major institutions such as Wells Fargo, Chase, Bank of America, Quicken Loans, etc.  If you have applied for a Condo Mortgage only to have the project denied, contact one of our Licensed Mortgage Bankers for a detailed review of your scenario to see how we can help today.

Conventional Loans:  Condo Mortgage Approval Guidelines

Denials of Condos for Conventional Loans account for the largest percentage of unnecessarily denied condo loan approvals.  Many lenders either do not understand conventional loan condominium financing guidelines, or add more restrictive approval guidelines than Fannie Mae & Freddie Mac require.  To thoroughly understand Conventional Condominium Loan Approval guidelines, you must understand the 2 categories of Conventional Condo Approvals:  “Limited Review” & “Full Review”.

Conventional Loans:  What are the Differences Between Limited Review & Full Review Condo Approvals?

Fannie Mae/Freddie Mac offer two categories of Condo Approvals:   Limited Review & Full Review.  A Limited Condo Review is a streamlined program offered by Fannie Mae & Freddie Mac for loans categorized as lower risk.  Condominiums underwritten under the Limited Review program are several times MORE LIKELY TO BE APPROVED than those submitted under the Full Review program.  In South Florida for example, less than 10% of loans submitted for full condo review will receive condo approval & close.  For this reason, knowledgeable borrowers often opt for a Limited Review Condo Loan.  

Limited Condo Review:  What Types of Loans Are Eligible?

  • Conventional Fannie Mae & Freddie Mac Loans

  • Primary Residences & Second Homes Only (Investment Properties are ineligible).

  • Available for Purchase, Rate & Term, and Cash-Out Refinances.

  • Credit Score is not a consideration in determining Limited Review eligibility.  

  • Available only for loans meeting the following Loan-To-Value requirements: 

Limited Review LTV/CLTV Requirements

(All States EXCEPT Florida)

  • Primary Residence – Maximum 90% Financing

  • Second Home – Maximum of 75% Financing

  • Investment Property – Ineligible

Limited Review LTV/CLTV Requirements

(Florida Properties)

  • Primary Residence – Maximum of 75% Financing on a 1st Mortgage.  90% Combined Financing on a 1st & 2nd Mortgage

  • Second Home – Maximum of 70% Financing.  on a 1st Mortgage.  75% Combined Financing on a 1st & 2nd Mortgage

  • Investment Property – Ineligible

Limited Condo Review:  Basic Condominium Requirements

Streamlined Condo Reviews require less documentation and have easier project underwriting standards than Full Review approvals.  Many lenders have additional requirements above and beyond what Fannie Mae & Freddie Mac require.  For this reason, a condo loan may be denied by the major banks yet still eligible for approval by Foundation Mortgage.  Below is a list of some of the basic requirements a project must meet to receive a Limited Review Approval.

  • HOA General Liability Insurance Coverage of at least 1MM required

  • Fidelity Insurance required for projects over 20 units

  • Flood Insurance required as determined by flood zone.

  • Lawsuits involving structural litigation are not permitted (unless the lawsuit is over the recovery of costs for repairs already completed).

  • Limited Review Condo Questionnaire confirming:

    • No hotel services/nightly or weekly rentals/mandatory rental pool.

    • No single entity owns greater than 10% of the units of the building.

      • Small 1-4 unit condo projects are eligible as long as no individual owns more than 1 unit.

      • 5-20 unit condo projects are eligible as long as no individual owns more than 2 units).

    • Commercial space does not exceed 25%

    • For new condominium projects, 90% of the units must be sold and control of the HOA must already have been turned over to the owners.

Full Condo Review:  What Additional Items Are Needed That Are Not Required For a Limited Review Approval?

Full Condo Review requires a much more vigorous underwrite of the project.  The additional items reviewed under the Full Review program ultimately result in the denial of many projects that would be approved under the Limited Review Program.  Below is a list of the most common items that cause a Fannie Mae & Freddie Mac Full Condo Project Review to be denied.

  • Association Budget & Balance Sheet

    • The current year approved budget must show that 10% of the operating expenses are to be allocated to a reserve account.

    • A reserve study in lieu of 10% reserves allocated from the current year budget may be considered if prepared within the past 24 months by an independent 3rd party with expertise in Condominium Project Reserves.

  • No more than 15% of the unit owners may be more than 60 days delinquent on their monthly HOA dues or special assessments.

  • No more than 50% of the units can be investor occupied for Fannie Mae Loans.

  • No more than 49% of the units can be investor occupied for Freddie Mac Loans.

Conventional Loans:  Best Practices – How Do I Know Whether I Should Apply for a Limited Review or Full Condo Review Loan?

There are several best practices to follow when shopping for condos & deciding whether to apply for a limited review or full review condo loan approval.  Following this best practice list will help you evaluate which approval option your project is eligible for, and answer any uncover potential problems as early in the loan process as possible and enable you to change programs if necessary- before it’s too late.

  • Click here To Review the Fannie Mae Approved Condo List to Search for Fully Approved Condos in your Area.

  • Do a quick google search or ask your realtor whether the condo offers hotel services or centralized rentals.

  • Ask for a copy of the approved budget BEFORE you make an offer.  The budget is one of the most common reasons a condo project is denied under the Full Review program.  It is usually very easily attainable at no cost from the seller’s realtor or the association and is a quick indicator whether the project may be eligible for a Full Review approval or not.

  • Ask for a copy of the insurances:

    • Master

    • Flood (if applicable)

    • Fidelity (if the project has greater than 20 units)

    • Law and Ordinance

The insurances are also typically relatively easy to obtain at no cost.  A quick review of the insurance basics by a Foundation Mortgage Banker will let you know if there are any obvious dificiencies that would prevent eligibility for Limited or Full Review approval and require you consider other non-traditional non-warrantable options.

  • Ask for copies of any pending litigation the association is involved in.  Your Foundation Mortgage Banker can review open litigation for cases pertaining to structural litigation or lawsuits that might threaten the liquidity of the operating budget which could impact the project’s approval.

  • Order A Condo Questionnaire

If the above items appear to meet guidelines, make sure a condo questionnaire is ordered at the beginning of the loan process.  The association may charge anywhere from $75 - $250 for the Condo Questionnaire.  The Condo Questionnaire will contain more detailed information impacting project approval.  Obtaining this information at the start of the process will help you determine whether there are any problematic items early in the process.

  • Make sure you select your insurance agent (for your HO6/Contents Policy) at the beginning of the process.  Most Lenders will not submit the condo approval information to their condo review department until the complete package is put together.  This includes your contents policy.

  • If you are financing in Florida and the condo is ineligible for a Full Review Approval, but you want or need to make a small down-payment for a purchase or have limited equity for a refinance loan, consult with a Foundation Mortgage Banker to consider splitting up the financing into a 1st and 2nd mortgage.  Reducing the 1st mortgage LTV to 75% for a primary residence or 70% for a second home and taking out a 2nd mortgage may help you accomplish your goals and bypass Full Project Review requirements.

Conventional Loans:  My Condo Is Ineligible for a Conventional Loan.  What are my Non-Warrantable Condo Options?

Some condominium projects just aren’t eligible for traditional conventional loan financing.  This is one of the reasons why it’s important to work with a Mortgage Banker that offers Portfolio & Non-Warrantable Condo Approval Options in addition to the traditional Fannie Mae & Freddie Mac Limited Review and Full Review programs.  After going through the steps listed above, and determining your condo project is not eligible for traditional financing, the next step will be to review your non-warrantable financing options with your Mortgage Banker. 

It is important that you review your scenario in detail if you were initially denied with another institution and are contacting us now.  Our team of Mortgage Bankers and Condo Reviewers can verify whether your loan was denied legitimately or whether the first lender made an error or had conservative condo guidelines and denied it due to a “Credit Overlay”.  If not, we can present you with non-warrantable & portfolio options that your condo may be eligible for.

FHA Loans:  FHA Condo Approval List

FHA loans require lower down-payments on purchases & allow for greater cash-out on refinances than are permitted under conventional loan guidelines.  You can purchase a condo in an FHA approved building with a little as a 3.5% down-payment up to the FHA county loan limit.  Cash-out Refinances in FHA Approved condos go up to 85% of the value of the property.  However, while FHA Condo loans require less equity than comparable conventional loans; FHA Condo Approval Requirements are more restrictive.  Click here To Search The FHA Website For A List Of FHA  Approved Condos In Your Area. 

VA Loans:  VA Condo Approval List

VA Condo loans require no down-payment up to the max VA County Loan Limit.  However, the condo must be on the VA Condo Approval List to be eligible for financing.  Click here To Search The List Of VA  Approved Condos In Your Area.