Buying condos 101
Condominiums are a great way for a first-time homebuyer or new investor to enter the housing market; however, there are some lending rules to be aware of before signing a contract and help ensure a smooth loan process.
Mortgage lenders consider several variables when underwriting a loan, however, a lender’s main concern is whether or not the condominium (condo) building is warrantable. Condo warrantability will differ between existing condo buildings and newly constructed condo buildings.
When addressing the warrantability of a condo building, the lender needs to know:
About any pending lawsuits against the association.
No lawsuits = Warrantable Condo Building
A lawsuit is a red flag and buyers should quickly learn the details of the lawsuit before signing any contract or making any offers. Structural
How many units are rented to non-owners.
Within the allowable occupied/rental percentages = Warrantable Condo Building
In the case of rental percentages, there is a difference between a new construction condo building and an established condo building.
A new construction condo building requires at least fifty percent of the units are sold to owner occupants and fifty percent can be rented units.
Established projects will allow in excess of fifty percent rental units, provided, buyers occupy the unit they purchase.
If the building allows blanket mortgages.
Association has required reserves = Warrantable Condo Building
Blanket mortgages cover two units under one mortgage. This is typically not an accepted practice; however, buyers should speak with a mortgage professional as there are many components and buyers may be within the guidelines.
While the height of the condo building has no bearing on warrantability, it’s best for buyers to let a mortgage professional know their preference. Some lenders prefer not to lend in projects that are higher high than 8 stories or contain too few units.
When shopping for a condo, buyers should ask the seller about pending lawsuits, rental occupants, blanket mortgages and the association’s reserve fund. It’s better to know whether the building is viable to purchase in or move on to the next.