Condo shoppers: 4 potential bumps in the road to a mortgage
By Gary Moukhtarian, Senior Vice President Consumer Finance, Webster Bank
The moment you see it, you know: This is the condo for you. But then comes the nitty-gritty of financing—and that can mean unexpected challenges.
As Millennials shop for their first home and empty nesters seek to downsize, condos are hot properties. With shopping and entertainment sometimes only footsteps from your door, they offer both generations the convenience and lively lifestyle they want.
Yet getting a mortgage on a condo can be more complicated than it is for a free-standing home. The lender has to consider the financial viability and infrastructure condition of the entire complex. Before you begin your mortgage search, here are some of the questions that your lender may raise:
Is the condo warrantable? Fannie Mae sets guidelines for the types of condo mortgages it will underwrite. If a property meets those criteria, it’s considered “warrantable.” That means the lender could sell the loan to Fannie Mae, if necessary—and makes the loan an acceptable risk.
A non-warrantable property is a higher risk. Therefore, you may pay a premium for it—i.e, a higher mortgage rate. A condo project that isn’t yet complete, for example, could be a non-warrantable property.
Does one person or entity own more than 10% of the units in your condo development? If so, that may limit your financing options and/or potentially increase your mortgage rate. (Should that one owner miss Homeowners Association payments, it could destabilize the Association’s finances.)
Is there a rental desk for units? That can be a red flag for a lender:
Rentals sometimes bring in transient traffic, not the stable, long-term owners that banks prefer. (Renters don’t always take the same pride in the property.)
How much retail or hotel space does the development have?
Not all lenders embrace the notion of retail businesses as condo neighbors. That may complicate your mortgage search. Lenders will look at the percentage of commercial vs. residential space in regard to warrantability.
Two other important considerations:
- Look closely at the Homeowners Association, because your lender will. Of course, your monthly fees are an important part of your budget. But is the Association itself financially sound with strong reserves? Will the complex need infrastructure improvements in the next few years—a new roof or boilers, for example? You could be looking at a special assessment which can drive up your Association fees for a year or more.
- Double check your insurance coverage. Is your complex in a high risk flood zone? If so, make sure the Association’s master policy includes a provision for flood insuranceAlso, consider purchasing content insurance: Since you only own the interior of your condo, you need coverage for your appliances, clothing, jewelry, and furnishings. The Association’s insurance won’t cover you in case of a loss from fire, flood or theft. It is best to speak to your insurance professional for your specific insurance needs.
How Webster can help
We’re uniquely positioned to help condo buyers for two key reasons:
Local know-how: With banking centers throughout the community, our lenders have in-depth knowledge of the local real estate scene—nuances that may escape lenders just reading facts on an application.
Condo Association expertise: Webster’s Sponsor & Specialty Group has a special unit for Condo Associations. So we’re intimately familiar with the financial needs of a successful condominium development. That knowledge can serve you well.
While you’re looking at condos, talk to your local Webster Banker. One conversation could get you in your new home, faster.
The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. All loans are subject to the normal credit approval process.