Why are Condos so hard to finance?

Real Estate Agent with Russ Lyon Sotheby’s International Realty AZDRE#SA550358000

Condo financing is not always easy! Mark Taylor provides some great advice and insight into why it can sometimes be a difficult process. Be sure to ask me if you're looking at condos and I'll help you find out if you can get financed, or if it will need to be a cash purchase. Even if the listing agent has said it is OK for FHA financing, it really may NOT be. Ask first!

Original content by Mark Taylor Mortgages 207897nmls# DOC#207897

Number one question I get asked now is "Hey Mark can you finance this condo?"

Good news is a few months ago I would just get a contract on my desk and have to call and say "sorry no way Jose" - at least things are changing for the better in terms of; I better check first before writing an offer!

So lets talk condo's. There are 3 types - Warrantable, Non Warrantable! and FHA/VA Approved

What is a Non-Warrantable Condominium?

If this condo project can be financed it is with very few niche lenders and a higher rate and heavy down payment 30%+

A Non-Warrantable condo is any condo that does not meet Fannie Mae guidelines. There are many rules and regulations to “Warrant” a condo with Fannie Mae. The five requirements for Fannie Mae to approve or warrant a loan in condo follow below. Fannie Mae Requirements for Warrantable Condos

  • 1.    No more than 10% of the total units in the complex are allowed to be owned by a single entity    (including the sponsor).
  • 2.    The number of owner occupied apartments must equal 70% of the total units (only apartments owned and used as a primary or secondary residences are considered owner occupied).
  • 3.    There can be no litigation concerning the structure/soundness of the building (ex. when the board decides to sue the developer for shoddy construction)
  • 4.    There must be a 10% reserve (of the yearly income)  built into the annual budget that is recurring year after year.
  • 5.    No more than 20% of the building’s total square footage is commercial space.

What is a Warrantable Condo?

Financing for this type of project is usually available with a minimum of 10% down if you can get MI Coverage

The term “Warrantable” refers to a condominium complex with features that lenders view as favorable in minimizing their risk exposure. Lenders feel that Warrantable features protect a complex from future hazards and situations that could threaten the value of the units. Warrantability refers to the condominium complex as a whole, not the individual units.

Features of a Warrantable Condo:

For a condominium complex to be considered “Warrantable,” it generally must meet the following Condo Warrantability requirements:

  • Most of the units are owner occupied (not renter or investment properties)
  • On established and existing projects, at least 90% of the units must be sold
  • For new and currently converted construction, 70% of the units must be pre-sold (closed or under contract)
  • 15% or less of the units can be 30 days delinquent on HOA dues
  • No more than 10% of a project can be owned by a single entity
  • No more than 20% of the project can consist of non-residential space
  • The Homeowners Association must have at least 10% of its budgeted income designated for replacement reserves

Additionally, other conditions do exist—pertaining to building insurance, HOA budget, etc, but the above conditions are generally deemed the most important to Fannie Mae and Freddie Mac—and therefore to most lenders.

Steps to see if a Condo is warrantable There is not an inclusive “Warrantable Condo List.” However, several steps can be taken to determine the eligibility of a complex, including:

  • Ask the property management company or the real-estate selling agent if the complex is considered “Warrantable.”
  • See if the condominium complex has met Fannie Mae Project Standards. This can be searched by state on the following website: Warrantable Condo Search
  • Have your lender provide you or your real estate agent with a Condo Cert (questionnaire) to be filled out by the Property Management Company. Note: Companies often charge a fee to fill out a Condo Cert.

FHA/VA Condo's that are approved?

If the project is approved then 3.5% down for FHA or Zero down for VA can be used.

For FHA the condo needs to be approved, you can find the FHA approved condo list at: https://entp.hud.gov/idapp/html/condlook.cfm 

Same for VA, it has to be approved, the VA approved condo list is at:https://vip.vba.va.gov/portal/VBAH/VBAHome/condopudsearch 

FHA Has pretty much the same guides as Fannie and Freddie.  There is no longer the option to do spot approvals on Condos anymore.
Here was the main catalyst for me writing this blog for my agent partners and their clients:
not approved
And hence why we have so many frustrated buyers in AZ and agents alike!
(if you are writing an offer call me before presenting it 602-361-0707
I will tell you if it is financable in minutes)

Guidelines for FHA/VA approval:

• Construction of the subject project or phase must be greater than 90% complete. 

• No more than 15% of the units can be past due on monthly Homeowners Association (HOA) dues 

• At least 51% of the units in the project or phase must be sold and conveyed to owner-occupants for use as a primary residence or second home. (it is possible for this to be waived if you are putting down at least 20%). 

• All facilities related to the subject project must be owned by the homeowners’ association or unit owners.  • No single entity owns more than 10% of the units in the entire project. 

• No more than 20% of the total building square footage can be used for nonresidential purposes. 

• If the project is a conversion, all renovation work must be completed to all units and common elements. 


So now you know as much as me - lets revisit some key points.

If taking a listing don't put on the MLS until you know the above - or better yet make the HOA complete the Ultimate Condo Questionaire I created to make sure you get flooded with the right type of buyers. ie do your due dilegence upfront!

If working with a buyer who wants a condo send them this blog and have them talk to their lender - condos are a different breed of home and the buyer needs be educated understanding issues such as fidelity bond, reserves, master association policies - far in advance of worrying about the CC&R's.  Rates tend to be higher, ratios tighter, LTV's more restrictive as it isn't so much a mainstream product as is an SFR.  And with the recent foreclosure fiasco and the highest concentration of defaults being in Condo's. Lenders are nervous to jump back into this segment until the condo arena has stabilized much more.

So if you have a buyer before making an offer go to the HOA and get them to complete this questionaire: Ultimate Condo Questionaire.

Now, please be warned the HOA's will want to charge, they will resist filling this form out completely. Because this form is an amalgamation of every lenders condo questionaire. So when I have a client I am not doing one at a time investor specific forms but covering all the basis so we know no matter what happens someone will finance this buyer's home for them as they have gotten all the information up front.

I hope you are all like me... surprises are great, but only at Xmas and Birthdays after that they are a nusiance - So my philosophy is get everything we can disclosed early and before someone's heart get set on a specific condo, so we never have a unpleasant surprise again.

Any questions always give me a call 602-361-0707


Thanks for stopping by reading, sharing, and commenting on my blog: Why are Condos so hard to finance?  

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Comments (2)

Jeremy De La Garza
Corpus Christi Realty Group - Corpus Christi, TX
Corpus Christi, TX

Thanks for the info! Special assessments even 20 years into a loan can result in defaults if its expensive enough. We had a complex with 8 units that fell into a river due to lack of maintenance, that resulted in a $26k special assessment on all units. The banks were having to sell the foreclosed units for $10k to even get rid of them. On one sale the bank ended up with $1200 on a loan balance 0f $85k. Risky business if not done right.

Jun 27, 2013 02:51 PM
Cari Dandy
Russ Lyon Sotheby’s International Realty - Scottsdale, AZ
Homes for Sale - Scottsdale AZ

OMG, Jeremy! That is crazy sounding! I have seen some very special surprises along the way! We have a number of HOA's suing builders over roofing issues and no one can sell their units except for cash. Makes condo buying definitely more risky business!


Jun 27, 2013 03:02 PM