Polyana da Costa: Want a mortgage to buy a condo? It's easier to get now

You may have heard that it is extremely difficult to get approved for a mortgage to buy or refinance a condominium. That was the case for several years after the housing market crashed, but lenders finally have loosened the rules on condo financing.

Borrowers seeking to get a condo loan these days will find more lenders to choose from and more condominiums that are eligible for financing, says Norman Koenigsberg, president and CEO of First Choice Loan Services.

"The market is definitely much more liquid," Koenigsberg says.

Mortgage giants Fannie Mae and Freddie Mac have eased some of the requirements on loans for condos, and a growing number of lenders offer loans that go outside the box of the condo rules in conventional financing, he explains.

Fannie Mae and Freddie Mac

Companies that buy mortgages from lenders, package hundreds or thousands of loans together, and then sell the resulting mortgage-backed securities to investors. To be eligible for sale to Fannie or Freddie, a loan must conform to minimum requirements. Eligible mortgages are called "conforming loans."

Why treat condos differently?

You'll still need good credit and stable income to qualify for a condo loan -- just as you would with a mortgage to buy a house. But you are less likely to face restrictions relating to the property itself. When approving a condo loan, the lender wants to make sure the building is financially stable. Because the financial stability of a condo project depends on the owners paying their bills, lenders tend to view condo loans as a riskier investment than a house.

Tough rules have been eased

After the foreclosure crisis, many condominiums faced financial difficulties because owners didn't pay their dues. Most lenders didn't want to risk lending to condo buyers. Lenders that offered condo financing asked for higher down payments and imposed restrictions that were more stringent than Fannie and Freddie required.

Lenders have eased those restrictions.

"Condominiums today are eligible for 95 percent financing with mortgage insurance," Koenigsberg says. That means that people can buy condos with down payments of 5 percent. For a few years after the housing bust, some lenders required down payments of 30 to 45 percent.

Changes for Fannie and Freddie Loans

Lenders are more flexible when analyzing condominiums' financial stability. Late in 2014, Fannie issued new guidelines to lenders allowing them to issue loans in developments where up to 15 percent of the owners were 60 days past due on monthly payments. The threshold had been 30 days.

Another change made it easier to finance condos in new developments. The new Fannie guideline reduces the presale requirement from 70 percent of the project to 50 percent.

Presale Requirement

For mortgage eligibility, the minimum percentage of units in a condominium or co-op that must have been sold to owner-occupants (and not to investors).

"These changes seem to have helped some people," says Michael Becker, branch manager for Sierra Pacific Mortgage in White Marsh, Md. "I have done a few condos recently, and I haven't had any issues in getting them approved."

Standards still have bite

Lenders still want to see that the condo association saves at least 10 percent of its revenue in a reserve account, Becker adds. And they generally don't want to lend in a building where a single investor owns more than 10 percent of the units.

Many condo buildings don't meet Fannie and Freddie's requirements.

"The most common reason today that consumers cannot finance a condo is the financial stability of the condominium," Koenigsberg says.

Outside-the-box loans

When a condominium doesn't meet the requirements of Fannie or Freddie, the gap is filled by lenders who keep the loans instead of selling them. Such mortgages are called portfolio loans.

"There are several options that have now become available for portfolio lending," says Orest Tomaselli, CEO of National Condo Advisors in White Plains, N.Y.

These lenders are willing to lend outside Fannie and Freddie's box of requirements, and the loan terms are comparable to conventional loans.

"It used to be that interest rates on programs like that were extremely high. Now they are close to market," Tomaselli says.

FHA Loans still rigid

The requirements for FHA condo loans, backed by the Federal Housing Administration, remain stringent.

If you plan to get an FHA mortgage to buy a condo, find out whether the condo development in which you want to purchase a unit is approved by the FHA, Tomaselli says.

"If you are only approved for FHA, I wouldn't even look at condos that are not approved by the FHA," he warns.

Do your homework

Regardless of whether you are using an FHA or a conforming loan to buy or refinance a condo, you should do your homework ahead of time, Becker says.

"Call the management company and ask them a few questions," he says. "That's probably what your Realtor should be doing for you, but if you think there might be an issue, you should call and find out."
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ABOUT THE WRITER
Polyana da Costa writes for Bankrate, which can be visited online at http://www.bankrate.com.
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