Condo Financimng Regulations
Financing a condo in Florida is easier here than it is in other states. Why? Because condos are a popular choice and the demand for a condominium unit is greater.
There are simply more condos which means more choices based upon location, price and available amenities. Yet while financing a condo follows a much the same path as financing any other residential property, there are a couple of twists you need to be aware of. Developers however who are in the condominium market know in advance how to prepare a condominium project for approval, so there really shouldn’t be any issues.
A condominium project must be approved by the lender as well as the applicant. The applicant is approved based upon income, credit, employment and sufficient funds to close. But the project must also receive an approval based primarily upon occupancy, financials and insurance. A condominium is managed by a Homeowners Association, or HOA, which is in charge of making sure the owners are following the rules and regulations all owners must follow.
As it relates to occupancy, the project should have an owner-occupancy rate of at least 50%. If there are more renters than owner-occupants, conventional and government-backed financing won’t be an option. Instead, such financing is for “non-warrantable” condos. Further, while commercial space is typical for a condominium project, ideally the square footage of the commercial space should not exceed 25% of the total square footage of the building. The project should also have sufficient cash on hand to meet any unexpected maintenance issues as well as provide evidence of sufficient liability coverage. Finally, no single entity can own more than 10% of the units in the project.
For projects that are considered “warrantable” they are eligible for conventional and government-backed loans.
Conventional loans are those underwritten to standards issued by Fannie Mae and Freddie Mac while government-backed loans include FHA, VA and USDA loans. USDA loans cannot be used for a condominium project but designed for those buying in rural areas.
Most condo loans ask for a down-payment of at least 20% for the best rates although there are options that ask for less down. The trade-off is typically an adjustment in the interest rate on the loan selected. Financing a condo also means choices. There are both fixed and adjustable rate loans available. Fixed rate terms range from 10 to 30 years in five year increments. Adjustable rate programs come in the form of hybrids, where the adjustable rate mortgage is fixed for an initial period of time before changing into a loan that can adjust once per year. A hybrid is designated as a 3/1 or 5/1 for example, with the rate being fixed for three or five years. A hybrid can be a good choice if the borrowers don’t expect to own the property for very long, receiving a lower rate compared to a fixed. A fixed rate is the ideal choice for those expecting to keep the property long term.