Even though condominium prices are reaching record lows in many parts of the country, getting bank financing to buy a condo can sometimes be problematic.
See also: Can you get a loan with bad credit?
Even if you have a sufficient down payment and good credit, you still may run into problems qualifying for a mortgage on a condo.
What could go wrong with a condo deal? Several things. For example, a lender could reject certain condo developments or there could be a sizable increase in homeowner's association fees. Sometimes you don't find out about any of these potential snags until the last minute, or even after you've agreed to buy the property.
Buying a condo during tough economic times has both pros and cons. Whether you're considering a condo as a retirement home or a vacation property, make sure you have answers to the following questions before proceeding with your loan application.
Does the bank consider the area a "declining market"?
If the answer is yes, it may be much harder to get a mortgage loan for a condominium. Banks may not extend attractive loans — or may not do much business at all — in areas where they think the value of condos and other homes are expected to drop dramatically.
For instance, even though home prices in southern Nevada are now less than half of where they were during the market peak in 2006, that region continues to experience falling home values. In February 2011, the median price of a condo sold in the area was $62,250, down 4.2 percent from the year before, according to the Greater Las Vegas Association of Realtors (GLVAR).
Perhaps that explains why 54 percent of homes bought in the region in February were bought with cash, the GLVAR reports.
So if you plan to buy a condo in a declining market, be prepared to close on the deal as an all-cash buyer. At the very least, expect to have a very large down payment — well above the standard 20 percent.
Is the building approved for FHA loans?
Ask the condominium manager if the building has been approved for Federal Housing Administration loans. If not, you should strongly consider another condo development because you'll most likely have difficulty getting a mortgage for any unit in that building.
Many lenders simply won't touch condominiums that are not on the FHA's approved list of condos. This is something you want to know about early in your house hunting — not after you've fallen in love with a property.
"We've had customers who have put down big down payments of $30,000 or more on condos, and then they can't get approved because the project isn't approved," says Thasunda Brown Duckett, senior vice president and Northeast region manager for Chase Mortgage, a division of JPMorgan Chase.
In some of these cases, Duckett says, buyers could lose their down payment. Duckett suggests that, before you hand over a down payment for a condo, double-check with your lender to confirm that the property you're interested in is on that bank's approved condo list. Also, in your purchase agreement, include a mortgage contingency clause stating the deal is only valid if you can get a mortgage and your bank approves the condo association and property.
What are the restrictions and limitations associated with the unit?
From parking rules to community and grounds access, make sure you fully understand what types of restrictions and limitations you are subject to as a condo owner. The condo unit is governed by a declaration and certain rules listed in the title documents.
You can review these documents on your own, or have a buyer's agent go over them with you so that you know exactly what to expect. You should also know how often and under what circumstances various condo association fees can be imposed or increased — with or without warning.
What is the occupancy rate?
Ask upfront about a condominium's occupancy rate — especially for new developments — because a shockingly high number of homes for sale are actually empty.
Consider Florida, which has traditionally been a magnet for pre-retirees and retirees seeking nice weather, a cheaper cost of living and plenty of condo offerings. In late March, the Census Bureau revealed that 18 percent of all homes in Florida, 1.6 million properties, are sitting vacant.
With a glut of condos on the market — in the Sunshine State and elsewhere — it may seem that you have your pick of real estate bargains from desperate sellers or developers looking to unload properties at rock-bottom pricing. No matter how attractive the pricing, be careful with condo units found in developments that are in the early marketing phase or still under construction.
Many financial institutions won't issue mortgages for condos where the development isn't already 70 percent sold, Duckett says. That's a way for banks to protect themselves against the risk of a potential failure of an entire development. When a condo project goes under, borrowers may be more inclined to walk away from their mortgages or the value of those condos can plummet.