Buying a condo may be more affordable, but it can also be more difficult to secure financing for it. This is the case with any financing including FHA, VA, and conventional loans. The FHA has strict standards in place so that they minimize their risk. It’s not just your creditworthiness or ability to pay the loan that matters. It’s also the status of the condominium development, including its owner-occupancy rate, physical, and financial health.
The Owner-Occupancy Rate is a Major Factor
If there’s one factor that matters the most, it’s owner-occupancy. That’s because condominium developments are very easily rented out. If a majority of the units are rented, though, it’s more of a condo hotel or timeshare.
This puts you and the lender at high risk. Namely, it risks the condominium’s value, physical health, and ability to be sold.
The Value of the Condo
There’s no scientific proof that the value of condos in a development where a majority of the units are rented is lower, but it tends to happen. There are stigmas that people believe in when it comes to renters. That doesn’t mean they are true, but in general, people believe:
- Renters don’t take as good of care of the property because it’s not their property
- Landlords don’t know when the property needs some TLC, leaving it in less than optimal condition
- Renters aren’t as community-minded, making the area less than desirable to live for homeowners looking for some connection
The Condo’s Physical Health
This goes along the lines with the condo’s value. Renters are known to not take as good of care of the property. They are not going to sink their own money into aesthetic appeal or repairs since they don’t have any skin in the game. It’s not their investment.
Hopefully, they keep it up so as to be livable, but other than that, they are restricted to the efforts of the landlord. There’s no way to predict how the landlord will be until the unit is being rented and time passes. If the unit or units start to deteriorate, it can wreak havoc on your chances to get any type of financing, let alone FHA financing.
Selling a Condo With a High Proportion of Rented Units
Finally, many buyers don’t want anything to do with living in an area where the units are mostly rented. This is especially true if it’s a timeshare type situation or condo hotel. People coming and going all of the time are even less likely to take care of the property. Plus, you have to do deal with the noise and nuisance of having different people in the units all of the time.
When the likeability of a development goes down, so does the value. Again, this makes it harder to sell the property to people that would live there full-time.
Each of these conditions is why lenders want to know how many units are owner-occupied and how many are not. If less than 50% of the units are owner-occupied, you cannot secure FHA financing. Of course, this isn’t the only requirement the condominium must meet.
The development must be 70% sold if it is a new development. There must also not be any litigation against the association and they must be up-to-date on their dues. If more than 15% of the units are past due more than 60 days on their dues, financing won’t be an option for you for this unit.
In addition, one investor cannot own more than 10% of the units and no more than 25% of the total development can be used for commercial purposes. Finally, the association must be able to prove its budget, bylaws, and meeting minutes to show they are in good standing.
Lenders and the FHA take a big risk when they give you a mortgage for a condo. It’s not impossible to get, but you must meet the above guidelines. Most namely, you must buy a unit in an area where there are mostly homeowners, rather than investors or renters.