Beware of Tougher Mortgage Lending Requirements for Condos

Condominiums have a lot of appeal to some retirees and baby boomers looking to downsize. We are brand new condo owners ourselves. I’m not going to review in this post all of the potential benefits and drawbacks of condominium living, because we are still learning. So far, so good for us. However, other potential condo buyers out there need to be aware of new mortgage lending standards being applied.

The mortgage lending problem for condominiums begins with the principle that most conventional mortgages are sold on the secondary market and/or may be insured by the F.H.A. This means that no matter who you are talking to about a loan for your condo purchase, that lender or broker will likely be subject to lending standards imposed by Fannie Mae and/or Freddie Mac and/or the F.H.A. Because of the mortgage default and foreclosure crisis of the past few years, those organizations have tightened their lending guidelines, particularly for the hard-hit condo market.

Let’s review some of these new guidelines:

  • Fannie Mae ordinarily will not buy a condo loan from a lender if more than 15 percent of the owners in the condo development are 30 days late on monthly maintenance fees.
  • Condominium associations must set aside 10 percent of their budgets for maintenance and reserves.
  • New condo developments (like ours) are ineligible for Fannie Mae or Freddie Mac financing unless 70 percent of the units have either sold or are under contract.
  • The F.H.A. requires that at least 50 percent of a building’s units belong to owners who occupy their units, and that no more than 10 percent are owned by a single investor.

Waivers of these requirements can be sought but I wouldn’t hold my breath.

We were aware when we bought our condo that obtaining conventional financing could be a problem, because we were the very first buyers in the very first condo building in our development. We also knew that we would not need a conventional loan. Instead, we arranged with the community bank that financed the entire project for the developer to give us a 20 year loan with a three-year balloon payment. This loan is kept in-house by the bank so the guidelines summarized above did not apply. Our plan is to pay the condo loan off in full before the balloon payment is due, when we sell our house here in Nashville.

A smart condominium developer will arrange for buyer financing ahead of time so that these new lending standards don’t cause trouble. Prospective condo buyers should be beware, however, and make sure that they have a well-crafted financing contingency in their purchase contract.

Here is a link to a longer article discussing these new condo lending standards: Stricter Lending Guidelines for Condos


  1. says

    These in-house loans are a perfect way to finance a condo, always. I think that developers who don’t think forward for their future clients and don’t have a good deal with the project partner bank will lose big time. And it applies even more in this kind of a stressful housing market. Anyway, the tighter rules make sense if we want to have a healthy housing market in, I don’t know, 10 years. Thanks for the post.

  2. says

    I can’t imagine how getting a conventional mortgage on a condo could be worse than the mortgage application process for buying a home.

    I have been going back and forth with a Florida bank for a month now and the only thing they haven’t asked for is what color toilet paper we’re going to use in the bathrooms.

    I am self-employed and realize it adds another layer to the verification process, but in all my years of buying homes I have never been subjected to a more rigorous and onerous examination.

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