Financial Literacy Month: Condo Mortgages Made Simple: What You Need to Know
Buying a condominium can be an exciting milestone, but securing a mortgage for one can be slightly different from financing a single-family home. Understanding the nuances of condominium mortgages can help you navigate the process smoothly and avoid potential roadblocks.
What Makes Condo Mortgages Different?
Condos are popular for many reasons—they typically require less maintenance and can be more affordable than single-family homes. However, financing a condo can be more complex. One key factor that lenders consider is whether the condo is “warrantable” or “non-warrantable.”
A warrantable condo meets the criteria set by government-sponsored organizations, such as Fannie Mae or Freddie Mac, which make it eligible for conventional mortgage financing. These condos are easier to finance, offer lower interest rates, and have more flexible down payment options.
A non-warrantable condo does not meet these standards, requiring alternative financing, as they are a riskier investment in the eyes of lenders. These projects may require alternative financing programs.
Characteristics of Warrantable and Non-Warrantable Condos
Warrantable Condos:
- Replacement Reserve Funding: The homeowner’s association (HOA) is financially stable, with at least 10% of its annual budget allocated to reserves.
- Ownership Concentration: No single entity owns more than 20-25% of the units in the project (or owns more than 2 units for a project less than 21 units).
- Commercial Space: The project’s commercial space (e.g., retail or offices) is limited to 35% or less of the total square footage.
- Litigation: No pending or active litigation against the project that could impact its financial stability, such as structural defect litigation; however, minor Matter Litigation is acceptable.
- Delinquent HOA Dues: No more than 15% of the unit owners are 60+ days delinquent in HOA dues.
- Insurance: The project has adequate hazard, liability, and flood insurance (if applicable).
Non-Warrantable Condos:
- Financial Instability: The HOA has financial issues, inadequate reserves, or a history of legal disputes.
- Ownership Concentration: A single entity owns more than 25% of the units in the project
- Commercial Space: Commercial Space exceeds 35 of the total square footage in the project or project building.
- Condotel: The project operates as a Condotel or is primarily a transient housing project.
- Insurance: The project lacks sufficient insurance coverage.
More Options Available!
FHA, VA, and USDA loans are also viable financing options for condos, offering lower down payments and flexible eligibility—especially if the condo meets their specific guidelines.
Understanding Condo Mortgage Payments (PITIA)
When obtaining a mortgage, it’s essential to understand how your monthly payment is structured. In the mortgage industry, the acronym PITI represents the four basic components of a home loan payment:
- Principal – The amount borrowed for the loan.
- Interest – The cost of borrowing the money charged by the lender.
- Taxes – Property taxes paid to the local government.
- Insurance – Unit Owner’s insurance is used to protect against damage or disasters to the condominium interior.
For condos, an additional component is added, making it PITIA:
- Association Dues (HOA Fees) – Monthly fees are paid to the homeowners’ association to cover operating expenses (maintenance, insurance, management), as well as setting funds aside in a reserve account for major component replacement (roofs, siding, streets, windows, balconies, etc.)
Financing Options for Condos
Southern Trust Mortgage offers conventional financing options (Fannie Mae, Freddie Mac) and government options (FHA, VA, and USDA). We also offer non-warrantable options, including Condotel financing. Contact your lender to see which program is right for you and the condo project you are interested in!
