Loan Requirements for Purchasing a Condominium Under Fannie Mae and Freddie Mac Guidelines

Financing a condominium purchase often requires a conventional loan. Most lenders sell these loans to Fannie Mae or Freddie Mac, so they must meet strict guidelines. Understanding these requirements can help buyers navigate the loan approval process.

Basic Loan Requirements

To qualify for a conventional loan, borrowers must meet specific credit, income, and down payment criteria.

• Credit Score: Typically, borrowers need a minimum score of 620. A higher score improves approval chances and lowers interest rates.
• Debt-to-Income Ratio (DTI): The DTI should not exceed 45%, but exceptions exist for strong borrowers.
• Down Payment: A primary residence requires as little as 3% to 5% down, while investment properties require at least 15%.
• Reserves: Lenders may require cash reserves to cover mortgage payments in case of financial hardship.

Condominium Project Approval

Fannie Mae and Freddie Mac assess the financial health and stability of the condominium project. They classify projects as warrantable or non-warrantable based on key factors.

Key Requirements for Warrantable Condominiums

• Owner-Occupancy Rate: At least 50% of units must be owner-occupied in new developments.
• Delinquency Rate: No more than 15% of owners can be behind on dues.
• Budget Reserves: The homeowners’ association (HOA) must allocate at least 10% of its budget to reserves.
• Litigation: Projects involved in major lawsuits may be ineligible unless issues pose minimal risk.

Limited vs. Full Review

Lenders conduct either a limited or full review of the condominium project.

• Limited Review: Available for primary residences with at least 10% down and second homes with 25% down. This process is faster and less strict.
• Full Review: Required for lower down payments or investment properties. Lenders scrutinize HOA finances, insurance, and compliance with guidelines.

Non-Warrantable Condominiums

Projects that fail Fannie Mae and Freddie Mac guidelines are non-warrantable and require alternative financing. Buyers may need a portfolio loan or a higher down payment.

Conclusion

Before purchasing a condominium, check the project’s eligibility and understand loan requirements. Proper preparation ensures a smoother approval process and better financing options.