Your credit score isn’t the only factor that lenders consider when processing your condo loan application. Even if you have a good credit history, your loan application can get rejected for no fault of yours.
Before approving your condo loan, the lender may inspect your building’s financial statements. If most condos in the building are unsold or if the sold units are primarily occupied by renters, getting financing can be difficult. Lenders may also check if the building has sufficient cash reserves to cover maintenance costs.
Statistics reveal that nearly 30 percent condo loan applicants face problems because the building’s finances aren’t good.
Why lenders are wary of condos
Condos carry many inherent risks and that is why lenders prefer to stay away from them. Since condos are part of a larger building, the owner has to pay association fees each month. These fees are used to cover the maintenance costs of the building. If existing owners do not pay the association fees regularly, or if most units in the building are unsold, the condo association may increase the monthly fees.
If there is a significant increase in the association fee, the owner may find it difficult to make the payment. They might even walk away from their investment. In that case, the lender will have to deal with an outstanding mortgage. Therefore, if more than 15 percent of the condo owners are already behind on association fees, getting a mortgage is now nearly impossible.
Luxury buyers can get private mortgages. These loans require large down payments. They are usually adjustable mortgages with higher interest rates than traditional loans.
In most cases, private loans are the only financing available for condos in buildings where nearly 25 percent of units are commercial properties. Buyers looking to purchase condos in buildings where a certain number of units are held by the builder will also have to explore the possibilities of getting a private mortgage.
Buyers can get private loans from community banks or local lending institutions. High credit scores are required to qualify for these loans. In addition, the borrowers should be ready to pay higher interest rates. If you are planning to apply for a condo mortgage, here are a few things to consider.
Condo buying tips
Before you start searching for a condo, you should have a meeting with the lender to know what criteria the building should meet to qualify for a loan. Discuss these requirements with your real estate agent, and they will be able to show you suitable properties.
Look for mid-sized or large buildings where most units are occupied by the owner. Smaller units are unlikely to qualify for a loan.
If you are getting private mortgage, you will have to make a down payment of at least 20% or 30% of the value of the property. If this is your second home, you should be prepared to make a down payment of at least 40%. If you are buying the property for investment purposes, getting a loan may be nearly impossible.
Since most condo loans have adjustable rates, your monthly payment will be relatively low during the initial period of the loan. But the rates can rise significantly when the loan resets. In addition, the monthly condo fees can increase if other owners do not pay their dues.