Condo Mortgage Rules

Condos are getting more difficult to buy because of mortgage rules.Condo image by Leticia Wilson from Fotolia.com

Lenders consider condos more risky to lend to than single-family homes, so they have made their rules regarding condo mortgages more strict. Condos are considered risky because a foreclosure on a single condo can reduce the value of every condo. Stricter rules on lending to condos can make it more difficult for the housing industry to recover.

Costs

In 2009, the cost for getting a loan on a condo went up, according to the Boston Globe. These higher costs can eliminate buyers altogether because condos are often purchased by individuals who cannot afford a single-family home.

Down payments on a condo now have to be at least 20 percent, even in areas where there have been no foreclosures, according to the Boston Globe. A down payment of 25 percent is needed to avoid paying a surcharge.

Individuals who have good credit and the appropriate debt-to-income ratio are affected just as much by condo rules as those with bad credit, according to the Boston Globe. In 2009, as a result, the National Association of Realtors started lobbying Fannie Mae and Freddie Mac to relax condo financing rules. While private lenders do not have to follow rules set by Fannie Mae and Freddie Mac, they still often comply to be able to sell these mortgages to the two companies.

A condo can only by financed once that 70 percent of the condos have already been sold. This has led to many condos being turned into rental units and has also prevented many qualified borrowers from finding a loan. However, if the condominium complex has a high chance of succeeding, lenders might waive this requirement, according to the Boston Globe.

Those who are having a hard time getting approved for a home loan, especially first-time buyers, are more likely to get approved for an Federal Housing Administration-insured home. However, the Federal Housing Administration has to approve entire condominiums before they can be sold, according to the Chicago Tribune. This slows the condominium sales process. Combined with the rule that 70 percent of the condo has to be sold before loans are approved, condominiums are becoming increasingly hard to sell.

Many rules that have always existed but that have been ignored are now coming into place as mortgage companies try to be more careful about who they loan to, according to the Chicago Tribune. One of these rules is that a condo complex must have at least four condos to be eligible for a loan.