If you're thinking about buying a condo or are weighing the benefits of condo ownership versus owning a single-family home, there is something important to keep in mind: the perceived risk of condo mortgages by lenders. This risk can make it more difficult -- and more expensive -- for home buyers to secure condo loans. It can also mean that you'll pay a higher interest rate over the life of your loan than you will for a single-family home.
While the interest rates for condos are technically no higher than those for single family homes, a fee that is often tacked on to a condominium mortgage can increase the overall interest rate. This fee of 0.75 percent is included on mortgages when borrowers put down less than 25 percent of the condo purchase price. The one-time fee can be paid up front as part of the closing costs, or can be added to the mortgage payments through an increased interest rate of about 0.25 percent.
This fee was adopted by major lenders in April 2009 to counter the higher risk and losses of condominium mortgages. This is due to the lender's reliance on the condo association's management ability in maintaining the unit and overall property. Underfunded and poorly managed condo associations can cause a serious decline in the value of the mortgaged condo. They can also lead to a sharp increase in association fees, which can quickly force residents to abandon their homes -- and their mortgages -- when they realize they can no longer afford to make payments.
Avoiding a Fee
Neither Federal Housing Administration loans or Veteran's Association loan include this "delivery rate fee," making these government-financed mortgages a potentially less expensive option for borrowers who can't afford a 25 percent down payment. To receive either an FHA or VA condo loan, however, the condominium project must meet stringent guidelines and be certified by the proper government agency. You can get certification details for the condo project you're interested on the HUD website for FHA loans or the Veterans Affairs website for VA loans.
What to Expect
Given the risks associated with condo mortgages, many borrowers will be turned down for loans -- even if they have perfect credit and a solid income. While some lenders deny condo mortgages altogether, most have a series of strict lending standards that must be met prior to approving a loan. For example, mortgage lender Fannie Mae requires that at least 70 percent of the units in a condo association are occupied. It also requires that at no more than 15 percent of condo owners are delinquent on their association fees.
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