Monthly maintenance fees are assessed each unit owner to maintain the exterior of the building, for upkeep of common areas, insurance, and often the cost of certain utilities. For loan underwriting purposes, this monthly fee must be included as part of your monthly housing payment when qualifying for a mortgage loan. 

Buying a condo is more complex than buying a single family home. It is much like buying into a business and joining a social group. The decisions reached by the Board of the Home Owner's Association apply to all unit owners and their decisions can have a profound impact upon values within the development.  

From a lender's standpoint, underwriting a condominium can be quite problematic.  In addition to the borrower's creditworthiness,  the lender must consider the financial and physical soundness of the entire project.  As part of the underwriting process, the lender must consider: 

• Is the project new, established, or prior conversion?
• Who is in control of the Homeowner's Association?
• Does the Association have control/ownership of all common areas?
• If the project is new, what percentage of units have been sold?
• Are primary residents permanent or second home purchasers?
• Does the development have adequate insurance?
• Are there any unusual conditions in the Declaration or Covenants?  
• What percentage of owners are delinquent on their monthly dues?
• How experienced and competent is Management?
• Are there any major capital expenditures anticipated in the near term?
• Does the development have adequate capital reserves for major repairs? 

In evaluating the development, the lender will be particularly cautious if less than 60% of the units are owner occupied or if the project is less than 90% complete. These issues must be addressed by the lender to comply with Fannie Mae project standards and secondary market requirements. Depending upon the above, the property may be subject to more stringent underwriting guidelines.    

Why Should A Buyer Be Concerned?

From a potential buyer's perspective, these issues should also be considered and viewed in light of protecting  their  "best interests".   If the association fails financially,  the development will not be maintained, residents will move out, and unit values will plummet. It will be very difficult to sell a unit that is facing substantial capital improvement assessments and for which the owner has little or no control over what other unit owners do or don't do with their property.  Further, in a new project, if the developer goes into bankruptcy leaving unfinished units or "bails out" before completion of the project or before conveying all common areas, the project could be tied up in litigation for many years.    

Available Financing

The loan programs available for condominiums are the same as those available for one- to four- family homes.  These include fixed and adjustable rate conventional loan programs and government financing such as FHA and VA which allow lower down payment and closing costs thereby qualifying more buyers. 

FHA now permits spot approval whereby lenders may approve existing condominium projects with  4 or more units thereby streamlining the approval process for potential buyers.

VA offers guaranteed,  low cost fixed-rate loans with easy qualification and  flexible terms  to eligible veterans, reservists, and buyers who served in the National Guard six or more years.  

Although some lenders may voluntarily waive a portion of these project requirements to low risk , low loan-to-value borrowers, the buyer  should be aware that this places them at more risk since they too may have difficulty reselling the unit and future lenders may not be as willing to waive the requirements. 

Other Property Types

Co-Ops and PUDs (Planned Unit Developments) follow similar Fannie Mae underwriting requirements as condominiums although they are somewhat different in a legal sense.

In a Co-Op or Cooperative Project, a corporation or trust holds title to the property and sells stock in an amount equivalent to the value of an apartment unit in the building.  A Co-Op can be a commercial or residential unit in a mixed use building.   The buyer does not actually own the unit but owns "shares" in the Co-Op and receives a lease or stock certificate as evidence of ownership. Typical lenders consider this type of ownership to carry more risk and will usually charge a higher interest rate.  

A PUD (planned unit development) is similar to a condominium except that the lot and usually the entire exterior of the building is owned.   The lot is sometimes referred to as a "drip line" lot since it only extends to the edge of the roof  line in most cases.  Each unit owner has a non-exclusive easement (right to use with others) on and over the common areas which include parks, recreational facilities, etc.