Financial Literacy Month: Condo Mortgages Made Simple: What You Need to Know
Buying a condo can be an exciting milestone, but securing a mortgage for one can be slightly different from financing a single-family home. Understanding the nuances of condo mortgages can help you navigate the process smoothly and avoid potential roadblocks.
What Makes Condo Mortgages Different?
Condos are popular for many reasons—they typically require less maintenance and can be more affordable than single-family homes. However, financing a condo can be more complex. One key factor that lenders consider is whether the condo is “warrantable” or “non-warrantable.”
A warrantable condo meets the criteria set by Fannie Mae and Freddie Mac, government-sponsored organizations that play a significant role in the mortgage market. These condos are more straightforward to finance, offer lower interest rates, and have more flexible down payment options.
A non-warrantable condo does not meet these standards, making it a riskier investment in the eyes of lenders. As a result, financing can be more challenging, with higher interest rates, larger down payments, and stricter loan requirements.
Characteristics of Warrantable and Non-Warrantable Condos
Warrantable Condos:
- More than half of the units are owner-occupied (not long-term rentals).
- The homeowner’s association (HOA) is financially stable, with at least 10% of its annual budget allocated to reserves.
- There are no legal disputes involving the condo association.
- There is no commercial space within the development.
- No short-term rental arrangements.
- The project is fully built and completed.
- No single entity owns a large percentage of the condo units.
Non-Warrantable Condos:
- A high percentage of units are rentals rather than owner-occupied.
- Primarily used for short-term rentals (e.g., Airbnb, vacation rentals, or timeshares).
- The HOA has financial issues, inadequate reserves, or a history of legal disputes.
- More than 25% of the development consists of commercial space.
- The project is still under construction.
- A single entity owns a significant portion of the condo units.
Understanding Condo Mortgage Payments (PITIA)
When obtaining a mortgage, it’s essential to understand how your monthly payment is structured. In the mortgage industry, the acronym PITI represents the four basic components of a home loan payment:
- Principal – The amount borrowed for the loan.
- Interest – The cost of borrowing the money charged by the lender.
- Taxes – Property taxes paid to the local government.
- Insurance – Homeowner’s insurance to protect against damage or disasters.
For condos, an additional component is added, making it PITIA:
- Association Dues (HOA Fees) – Monthly fees are paid to the homeowners’ association to maintain the property and shared amenities.
Financing Options for Condos
While financing non-warrantable condos can be more challenging, it is still possible. Due to the growing demand for this type of financing, Southern Trust Mortgage offers loan options for both warrantable and non-warrantable condos—whether for primary residences, second homes, or investment properties (for both purchases and refinances).
