Condo loans are tougher to get
A condo used to represent the easy way to own a home -- no lawn to mow, no water heater to worry about, no siding to paint.
While it's still easy enough to live in a condo, there's nothing easy about financing one anymore.
Lenders worried about plunging prices have become reluctant to make loans for condominiums. In some cases, even buyers with great credit and big down payments have trouble getting loans.
If a bank or mortgage company wants to sell your loan to the two big government-run mortgage underwriters -- and it almost always does -- then it has to follow Fannie Mae and Freddie Mac's rules.
Those make it more difficult to finance a condo in a couple of ways:
Fees are up. No matter how good your credit score, there's a three-quarter-point fee -- that's $750 for every $100,000 you want to borrow -- for financing a condo. Any condo.
They're real picky about the building. Neither Fannie nor Freddie will buy loans in buildings where more than 15% of residents are 30 days behind on their monthly association dues. In new developments, they will back loans only if 70% of the units are presold, up from 51%.
Of course, you want to avoid buying a condo in a "bad building," too.
You don't want to live in a new high-rise that's half empty -- or half rentals -- that the developer can't afford to maintain. Or in an established building where repairs can't be made because unit owners aren't paying their dues.
But the housing crisis has driven prices so low that there are some serious deals out there if if you can come up with the financing.
Here are some ways to get around the new rules and the reluctance to make condo loans:
- Look at older buildings. You won't have to worry about the restrictions on new construction.
- If you have your heart set on new construction, have your real estate agent look for a building in which units are selling more quickly than average. Developers can get a waiver of the 70% rule from Fannie or Freddie, but only if the project stands a strong chance of success. This kind of momentum is a huge help.
- Don't take out a loan that's bigger than Freddie and Fannie will buy -- $417,000 to $729,500, depending on the market. A lot of lenders are simply more willing to make smaller loans than bigger ones.
- The bigger the down payment, the more likely you are to be approved. Lenders want anywhere from 25% (or 25% equity if you're refinancing) to nearly 50%, depending on location and type of condo you're trying to buy.
- If you don't have that much, then you'll need to qualify for an FHA loan. That can reduce your down payment to as little as 3.5% because the federal government guarantees the loan will be repaid even if you default. But you'll need to know if the development you're looking at is on the Department of Housing and Urban Development's approved condominium list. (If it isn't, ask the building owner to apply for "spot approval.") Among the qualifications HUD requires: The development must be complete and 90% sold with at least 51% of the units owner-occupied.
- Consider a townhouse. You get many of the pluses of a condo -- easy maintenance, a lower price than a single-family home, a pool and common areas -- but you own the land your home sits on. To a waffling lender, that might be enough to make the difference.
- Don't give up if you're rejected. There's such a huge disparity in underwriting requirements right now that you should keep shopping and apply to another bank or mortgage company.
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