Condo Loans: Mortgage Financing for Urban Home Buyers

Condominiums are a popular housing option for many home buyers, offering a mix of affordability, convenience, and low maintenance. Whether you’re a first-time home buyer, downsizer, or investor, buying a condo often requires a slightly different financing path than buying a traditional single-family home, and condo loans can fill this gap.

This article will explore what condo loans are, how they work, how lenders evaluate condos, and what you need to know before applying, especially if you’re buying in an urban market like Seattle, Los Angeles, or Portland.

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What Is a Condo Loan?

A condo loan is simply a mortgage used to buy a unit in a condominium. The financing structure is similar to loans used to purchase single-family homes, but with additional underwriting elements due to this unique form of ownership.

In a condo, you own your individual unit but share ownership of common areas, such as lobbies, hallways, pools, and elevators, through a homeowner association (HOA). This shared responsibility means lenders are tasked with evaluating both the borrower and the complex.

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Why Are Condo Loans Different from Traditional Mortgages?

Lenders take on more risk when financing condos because of additional concerns over how the HOA is managed and how the overall property is cared for by the unit owners. As such, not only are lenders required to assess the borrower (credit score, income, debt, etc), but they also have the added responsibility of reviewing the condo project, including the following:

Budget
Insurance
Owner occupancy
Litigation

If there are any financial or legal issues with the building, it could derail the loan, even if the borrower is qualified.

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Warrantable vs. Non-Warrantable Condos

A significant factor that affects condo financing is whether the unit is in a warrantable or non-warrantable project. Distinguishing between the two is important:

Warrantable

– Meets Fannie Mae/Freddie Mac guidelines

– Conventional, insured loans

– At least 50% of units are owner-occupied

– No single owner owns more 10% of the units

– Adequate reserves

– No significant construction defects

Non-Warrantable

– Does not meet guidelines (litigation, low reserves, etc)

– Portfolio or Non-QM loans

– Higher interest rates

– Larger down payments

City centers often have non-warrantable condos for several reasons, including the following:

High investor ownership
Short-term rentals (Airbnb, VRBO, etc)
Litigation
New construction with incomplete documentation

Condo Loan Eligibility Requirements

Lenders assess both the borrower and the condo project. Here’s what they look for:

Borrower Requirements

Credit score: Minimum 620+ for conventional loans, 580+ for FHA loans.
Down payment: 3% – 20%+, depending on loan type.
Debt-to-income (DTI) ratio: Typically capped at 43%.
Employment & income: Stable income and employment, demonstrated by pay stubs, W-2s, and tax returns.
Assets: Verify funds for down payment and closing costs.

Condo Project Requirements

HOA budget and reserves: Ideally at least 70% funded to ensure coverage of routine expenses and major repairs.
Percentage of owner-occupied units: Ideally over 50% of units are owner-occupied to signal community stability.
Percentage of delinquent HOA dues: Low delinquency rates (under 15%) reflect strong financial health.
No ongoing litigation: Absence of unresolved legal disputes reassures lenders that the HOA is not exposed to financial risk.
Insurance coverage: Adequate insurance is often required by lenders for associations with 20+ units.

Tips for Securing a Condo Loan

To maximize the odds of condo loan approval, consider the following tips:

1. Check the Condo’s Status Early

Before making an offer, ask your real estate agent to see if the building is warrantable.

2. Request a Condo Questionnaire

Lenders may ask the HOA to complete a questionnaire about the building’s financials, occupancy, insurance, and litigation status. Get this questionnaire as soon as possible to avoid delays in the loan process.

3. Review the HOA

Look over the HOA’s budget and reserve funds to verify that the HOA is well-managed to protect your investment.

4. Budget for HOA Fees

Consider the monthly HOA dues and how they affect your affordability. Lenders will consider these fees when calculating your DTI ratio.

5. Work With a Seasoned Lender

Use a mortgage lender that’s experienced with condo loans, particularly in urban markets where non-warrantable properties may be more common.

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Types of Condo Loans Available

Condos can be financed through many of the same programs used for single-family homes, including the following:

Feature

Definition

Key Features

Conventional Loans

Home loan offered by lenders that isn’t backed by the government

– Down payment as low as 3%

– Fixed or adjustable rates available

– Must meet “warrantable” condo project guidelines

FHA Loans

Government-insured mortgages to help borrowers with lower credit scores or limited savings qualify for homeownership

– Down payment as low as 3.5%

– Condo project must be FHA-approved

– More flexible credit/income requirements

– Mortgage insurance required

VA Loans

Government-backed mortgages available to eligible veterans

– $0 down payment

– No mortgage insurance

– Condo must be VA-approved

– Lower rates than conventional in many cases

Jumbo Loans

Mortgages that exceed the conforming loan limit set by the Federal Housing Finance Agency, typically used to finance high-cost properties

– Loan limits vary by county

– Larger down payments may be required

– Higher credit scores needed

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FAQs

Can I use an FHA loan to buy a condo?

Yes, but the condo must be FHA-approved.

What's the difference between a townhome and a condo?

A townhome typically includes ownership of the land beneath the unit and may have fewer shared walls. Condos are typically units in a building with multiple floors and units, with shared common areas and no land ownership.

Are condo loans harder to get?

Not necessarily, though the building also must pass extra checks.

Can investors use condo loans?

Yes, but they may require higher down payment requirements and stricter underwriting.

What if the condo is in the middle of litigation?

Lenders may deny financing if there are still unresolved legal disputes, unless the litigation is minor or well-documented.

What is the owner-occupancy requirement?

Lenders often require that at least 50% of units be owner-occupied to qualify for condo financing.

Can I use a condo loan to buy a vacation home?

Yes, condos are often used as second homes and may qualify for financing, though a larger down payment and higher credit score may be required.

How is a condo loan different from a regular mortgage?

Condo loans require lenders to evaluate both the borrower and the building’s financial health, including HOA reserves, occupancy rates, and any pending litigation.

States we lend in

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Final Thoughts

Condo loans offer accessible and affordable financing solutions for home buyers looking to purchase condos, but come with underwriting complexity due to shared ownership structures. Understanding the traits of condo financing can help you navigate your purchase with confidence, whether you’re a first-time home buyer in downtown Seattle or an investor looking at a condo in San Diego.

Need Condo Financing?

If you’re looking to buy a condo in the Pacific Northwest region — including WA, OR, ID, CO, and CA — we can help. At Sammamish Mortgage, we offer various mortgage loan options, including mortgages needed to purchase condos. Visit our website to get an instant rate quote, or get in touch with us today to have your mortgage questions answered!

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Condo Loans: Mortgage Financing for Urban Home Buyers

Our Reputation Speaks For Itself

What Is a Condo Loan?

Find the Best Mortgage Deals for You

Why Are Condo Loans Different from Traditional Mortgages?

Warrantable vs. Non-Warrantable Condos