Buying a condo for investment makes for a profitable strategy. This is because condominiums are generally more affordable than other rental properties. Most condos are also in desirable locations. Therefore, the likelihood that you will rent out your condo will be much higher than if you were to invest in a single-family house in the suburbs.
However, you must note that the terms for financing a condo are somewhat different from those of an investment property mortgage for single-family homes. Financing a condo investment requires some more additional terms and regulations that you will have to fulfill.
Luckily, given the flexibility in payment terms of condos for sale accompanied by the different financing methods and types of loans out there, buying a condo investment has been made easier.
In this article, we will provide you with the steps that you must take when financing a condo investment. But before we talk about a rental property mortgage for a condo investment, let’s explore the advantages of buying a condo investment.
Advantages of Buying a Condo Investment
First, when you buy a condo investment, you won’t be responsible for the maintenance of the building, common areas, grounds, or landscaping. Therefore, as a real estate investor, you can save your time for other tasks.
Second, condos are generally in desirable locations, meaning more demand for the property. Beachfront condos, for example, will make you thousands of dollars a week during the summer. Similarly, condos located in or near skiing destinations will bring in high rental income in the winter.
Third, condos are smaller and more affordable than single-family homes that tend to be more expensive. Thus, they can be easier to buy and rent out.
First, Ensure Your Condo Association Is Approved by the Lender
The qualifications for financing a condo for the borrower are almost identical to those for other investment properties. However, when you are financing a condo, there are qualifications that the condo association needs to meet in order to start the lending process. You have absolutely no control over these qualifications and will certainly fail to qualify for a loan if your desired condo association is not approved by the lender.
Whether you are looking to acquire conventional loans such as those received through banks, credit unions, hard money lenders, or the two government-sponsored enterprises (Fannie Mae and Freddie Mac) or FHA loans, your condo association must abide by the following general rules:
- Condo association to pay at least 85% of Homeowners Association (HOA) dues and on time
- An appropriate insurance set in place
- Adequate budget reserves, about 10% of their funds
- No pending litigation that could result in costly legal fees and lawsuits
- No anticipated special assessments
If you cannot afford to pay a large down payment for your condo, we recommend resorting to federally qualified lenders (FHA loans). Note that FHA loans are more rigid when it comes to real estate investments as you will have to live in the property for a set time before being able to rent it out.
According to the US Department of Housing and Urban Development (HUD), the condo must be on the FHA-approved condominium list. FHA guidelines stipulate the following:
- At least 80% of all FHA loans in the complex must be for owner-occupied units
- At least 51% of the units must be owner-occupied
- The project must have been completed for at least one year, with no pending additions or phases
If the condo investment you’re looking to purchase fails to get approved by any of the aforementioned programs, it’s possible to get a condo loan. You can resort to hard money lenders. However, these lenders may impose a down payment of 50 percent or more, as well as higher interest rates. Therefore, it is necessary to get your condo investment approved and mortgage application started before initiating a deal.
Second, Get Pre-Qualified
In the pre-qualification process, your lender demands that you provide financial information in order to comment on your financial solvency. The financial information includes information about your debt, income, and assets. The lender will then provide you with a rough estimate of how much you can borrow. In this stage, your lender will comment on the various mortgage options you can apply for.
Third, Get Pre-Approved
This is where the official mortgage application begins. In the pre-approval stage, you supply your lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. Whether you are trying to retrieve a Housing Administration (FHA) loan or a conventional loan for your condo investment, you must have a high credit score. For FHA loans, you’ll need a credit score of at least 580 to qualify. While for conventional loans, you must have a score of 620+ to qualify. For real estate investors who have credit issues and/or want to retrieve a mortgage quickly, we recommend resorting to hard money lenders (or private money lenders).
Consult with a mortgage broker to learn about the options available to you. A mortgage broker is an intermediary who brings mortgage borrowers, like yourself, and mortgage lenders together. They will prepare and help you with the paperwork necessary to qualify for a loan. Moreover, if you are keen on obtaining FHA loans or conventional loans but have bad credit issues, a mortgage broker can help you find ways to increase credit score.
Moreover, the lender will verify your financial and employment history in the pre-approval process. Mortgage lenders want to make sure that you have a high income as compared to the debt you are requesting (debt-to-income ratio). Lenders prefer a debt-to-income ratio of 36%. The highest ratio you could have to qualify is 43%. Mortgage lenders also want to assure that you have a solid credit report.
Finally, You Can Begin the Mortgage Application Process
Once you have been pre-qualified and pre-approved, you can start the mortgage application process. If all goes well with the mortgage processing, you can go ahead and close on your condo.
Financing a condo can be a difficult process with all the qualifications that you and your condo association must meet. We recommend searching for condo complexes that are approved so as to qualify for a loan for your condo investment. Additionally and aside from condo association qualifications, make sure that you do not have any outstanding debts. Remember, significant and outstanding debts may prevent you from getting qualified for an investment property mortgage.
Lastly, if you are buying a condo to rent out, resort to our investment property calculator. We have tailored this tool to calculate the possible financial outcomes of the mortgage used for your investment property.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.