Condo financing is going to change indefinitely come January 1, 2022. This is mainly because of the Surfside condominium collapse that occurred in Florida in June, where the 12-story Champlain Towers South crumbled and killed 98 people after much-needed maintenance was repeatedly deferred. The collapse renewed the regulatory focus on the condo market, and new rules are being put in place to prevent similar disasters from happening.
If you’re in the market to buy a condo, you don’t want to miss this post. I’m going to tell you what you need to know about the coming changes, the challenges you’re likely going to face, and what you can do to ensure the smoothest experience when securing your condo.
But first, let’s cover some basics about condo financing.
What is condo financing, and how does it work?
You’re probably familiar with some of the physical differences between condominiums and single-family homes. These differences are important because they are what make condo financing more tricky than financing a single-family home.
When you purchase a home, you’re buying the structure and the land attached to it. A condo, on the other hand, is a unit that’s attached to or within a larger building. When you buy a condo, you’re buying only the unit. You’d think that this would make condo financing simpler than financing a home, but it’s actually the opposite. That’s because condos are usually managed by a homeowner association, or HOA.
The HOA is made up of members of the condo community (including you). It’s like a small governing body responsible for setting rules for condo owners, providing amenities and maintenance, and more importantly, helping potential owners get the mortgage loans to become actual owners. And this is where a lot of the extra steps come into play regarding financing.
Now, you can take advantage of most of the same types of loans as if you were buying a single-family home. These loans include:
One major difference of condo financing is your loan will typically be subjected to a slightly higher interest rate than if you were buying a home. This is because your HOA can impose rules, restrictions, and special assessments that you can’t control, which lenders see as an added level of risk. If you want to get a better idea of what your interest rate might be, check out my post about 5 key ways to understand mortgage interest rates.
Another difference is that because your condo is part of property owned by a separate entity such as a developer, additional documentation must be submitted to your lender for review. The goal here is for your lender to ensure that the condo project meets regulatory requirements, which helps assess the risk they’re taking when financing your purchase. Part of this extra documentation often includes inspection and maintenance records on the structure itself. With the Florida condo collapse, there’s now more scrutiny surrounding this portion of the review/approval process.
How the Florida disaster impacts condo financing everywhere
The Champlain Towers South collapse was a first-of-its-kind tragedy. If you’re not familiar with what happened and what caused the tower to crumble, here are some key takeaways:
- Significant repairs and maintenance were needed ever since the building opened in 1981
- Inspections consistently revealed concerning problems with structural components such as concrete
- Maintenance was continually deferred due to cost concerns
The collapse has prompted regulatory action, and Fannie Mae has changed its guidelines to more heavily scrutinize applications for condo financing. Because many residential condominiums were built more than 20 years ago, people are now concerned that similar disasters will occur as buildings continue to age. The new changes hope to address this concern, and will go into effect on January 1, 2022. I’ll get into some of those shortly.
The TL;DR for you (the buyer and borrower) is that the process is going to be even more tricky when the new year comes. The new guidelines will restrict your buying options to condo projects that are really on top of their maintenance and building codes. Underwriting times are also likely to increase and prolong your move-in date. That’s why it’s important to partner with an experienced loan officer like yours truly, who can steer you away from the hassles and anxiety that can come with the new guidelines.
What condo financing changes to expect in 2022
Here’s what you need to know regarding Fannie Mae’s upcoming guideline changes to condo financing:
- If you buy on or after January 1, 2022, the changes will affect you
- The new guidelines will be in effect indefinitely and apply to all condos, not just high-rises
- You won’t be able to get a loan for a condo that’s been inspected and documented as having unsafe conditions
- You won’t be able to get a loan for a condo that’s unable to pass inspections, or that hasn’t obtained a certificate/recertification of occupancy
- When you do find an eligible condo to finance, your HOA must submit even more documentation to your lender, which can prolong your buying process
What else do you need to apply for a mortgage?
All these guidelines might seem scary, but don’t get discouraged. I’ve helped many buyers like you get into the condo of their dreams. Just call 508-407-8300 and let me show you how.
In the meantime, download our document checklist to see just what you need when applying for a mortgage.