How To Refinance A Condo: The Ultimate Guide
Condos can be a great investment for someone in the right situation, but some special requirements go along with condo financing. Not only must you be approved for financing, but the condo project must also be approved.
Applying and qualifying for a condo mortgage is similar to applying for a loan on a standalone house, but that doesn’t mean you’ll want to stick with your original loan over time.
You can refinance a condo and potentially lower your mortgage interest rate or tap into your home equity. The process will go much smoother if you know what to expect going in, though.
Traditional Refi Vs. Refinancing A Condominium
In many ways, a condominium refinance is very similar to any other home’s refinance process. The lender will examine your income, assets and credit to determine your individual qualifications for financing. The condo is also appraised to help assign a property value just as a traditional single-family home would be.
The added piece with a condo is that the condo project itself must also be approved because the communal spaces and the services the association provides have a huge impact on the property value of individual condos. A big part of the allure of a condo is the additional amenities the association offers. Those extra features can only be provided if the condo association is in good financial shape, so mortgage lenders and the investors they work with take a hard look at the condo association during the approval process.
Keep in mind, too, that condos are typically built in phases. A builder and/or condo developer will go to the authorities with a master plan that says they’ll have a certain number of buildings or units completed by a certain date before moving on to the next phase of construction. If the condo project is completely finished and established, the documentation required by lenders is different from the information needed for projects still under construction.
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Which Condos Need Review?
It’s worth noting that not every condo is subject to condo review. If you’re getting a conventional loan on a detached or site condo, standard condo review rules don’t apply, because detached or site condos are treated like a single-family residence. The same is true for condo projects that have no more than four units. Insurance for both of these property types will still be reviewed.
To get an FHA loan through the Federal Housing Administration, a site condo doesn’t necessarily need to go through a full approval process, but certain requirements must be met, including a review of fees for common areas. Effective since 2019, FHA-approved condos can either be an entire condominium community or a single unit. Insurance and maintenance costs must be the owner’s responsibility. Site condos do require full Department of Veterans Affairs approval in most instances.
What you can expect from the condo review process will depend largely on whether the loan you’re getting is backed by the federal government or is a conventional loan backed by a private lender and perhaps purchased later by Fannie Mae or Freddie Mac.
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Condo Review For Government-Backed Loans
To be backed by the FHA, the condo project must be on the FHA condo project approval list. The exception would be the site condos mentioned above.
If you’re eligible for a VA loan and looking to use your VA entitlement to get a condo, the project has to be on the VA condo approval list.
If a USDA loan is being refinanced, the lender will first check to see if the condo is on the FHA or VA condo approval lists. If not, you may still be able to qualify for a USDA refinance based on a review of established condos.
What If My Condo Complex Isn’t On These Lists?
If your government-backed loan through the FHA or VA isn’t on the approval list, you have a couple of options. The easiest one is to apply for a conventional loan, but that may not be the best or even a possible option for some borrowers.
You can also work with your lender and condo association to get your condo approved through the FHA or VA. This can be a long process, but if you’re looking to refinance and one of these agencies provides the best possible option for you, it may be worth exploring with the help of a Home Loan Expert.
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Condo Review For Conventional Loans
If you’re getting a conventional loan, condo approvals work slightly differently. The type of approval you get may depend on your qualifications as a borrower and whether construction is fully complete. Let’s briefly walk through the construction piece so you can understand what the terms mean.
Established Condos Vs. New Construction Condos
It’s important to know whether you’re dealing with a new construction condo or an established condo project, because it affects the type of condo review that takes place.
If construction is complete in all phases, control of the homeowners association has been turned over to unit owners and the appropriate percentage of units has been sold, the condo complex is considered established.
Understanding what counts as new construction is perhaps more complex than you think. A condo is considered new construction if:
- The condo project construction isn’t fully completed
- The project still has more phases in its future
- The site has recently been converted into a condo project from another use, such as an apartment building or warehouse
- The builder/developer still controls the condo association
Also, if the investor is Freddie Mac, a project is considered new construction until 75% of the units have been sold and closed. For Fannie Mae and jumbo loans, projects are considered new construction until 90% of the units are sold and closed.
Established Condo Projects
Let’s start the review of conventional loan condo approvals with already established condo projects. Although some exceptions exist, most standard condo approvals will break down into a limited or full review.
Limited Review
Suppose you’re looking to qualify for any type of refinance on your condo. In that case, a limited review can be desirable because it requires less documentation. To qualify, clients in most states need to be aware of a couple of requirements:
- For a primary residence, you need to have at least 10% equity left in your condo after the refinance.
- For second homes or investment properties, you need to leave at least 25% of the value in your condo after the refi.
Florida has some different requirements to qualify for a limited review:
- For primary residences, the remaining equity requirement is 25%.
- If it’s a second home or investment property, you’ll need to leave 30% equity in the home.
Depending on the investor in your mortgage, you may be required to have a full condo project review regardless of the amount of equity left in your home after the refinance. Your Home Loan Expert can get you into the best possible loan option.
In a limited review, a lender will look at:
- Insurance coverage: The condo association must at least have enough insurance to cover common areas, amenities and equipment shared by each owner in the condo association. The association may also insure the full value of each individual unit itself. If they don’t, the unit owner will be responsible for a walls-in policy covering the interior of the unit. The review may also include hazard insurance, such as flood and wind coverage, as applicable.
- HOA requirements: Unit owners have to be in control of the HOA.
- Control of units: Limits are placed on how many units can be under the control of a single entity. If the project has 5 – 20 units, the limit is two units. If there are more units than that, the limit is 20% – 25% of the project depending on the mortgage investor involved with your project. Under certain circumstances, units may be counted differently. So, be sure to talk to your Home Loan Expert to find out.
- Legal issues surrounding the condo association: There will be a review of any pending litigation in which the condo association is a defendant.
If you have less than the required amount of equity to get a limited review for your property type or limited review isn’t offered for the particular loan you’re working toward, you can still proceed with a full review.
Full Review
In a full review, the condo complex must turn over everything they would need to turn over in the limited review, plus:
- In addition to having a master insurance policy that covers common areas and equipment available to all unit owners as before, the insurance must include at least $1 million in liability coverage per occurrence.
- If the condo project has over 20 units, fidelity bond coverage must be in place to cover the association in the event that HOA funds are mismanaged.
- The association’s budget is reviewed to determine its financial health and make sure it meets minimum reserve requirements. Restrictions are also placed on how much of the association’s income can come from sources outside of typical business operations for an HOA, such as a restaurant or spa. Your Home Loan Expert can provide specifics.
- A standard condo questionnaire must be completed.
If you’re refinancing an investment property, at least 50% of the units within the project must be owner-occupied.
New Construction Condos
If you’re refinancing a condo in a complex that’s not finished or otherwise doesn’t meet guidelines for an established condo, different review policies are in place. These policies may vary depending on the investor in your loan, but they’re the basics of what you need to know to qualify.
Borrower Qualifications
To qualify for a new construction condo under certain programs, you need to have at least a median FICO® Score of 700 or higher. If you have a co-borrower, lenders take a look at the lowest median credit score of all borrowers on the loan. If you’re looking for a jumbo loan, those guidelines apply, so your score may need to be slightly higher to refinance certain properties.
New Construction Condo Review Basics
A major review guideline for new construction condos pertains to budget review. Specifically, 10% of the association budget must be allocated toward replacement reserves. If any guidelines of the budget review fail, a more thorough reserve study is undertaken.
There are several exclusions to what’s included in this calculation. For example, cable TV and internet access income may be collected, but they’re not included for the purposes of determining required reserves. The same is true for monthly utilities and income from special assessments outside of the regular dues. Income is only included in the budget review if it’s for ongoing operations of the association, maintenance or capital improvements.
No more than 15% of members within the HOA can be delinquent on dues by 60 or more days.
Standard condo litigation and insurance reviews apply. Like established condos under full review, there must be $1 million in liability coverage as well as fidelity coverage.
What Will You Need From Your Condo Association To Refinance?
Your COA will have to provide various documents related to the review items above. The good news is that the people running the association should have access to these documents and be able to tell you how to get them. If not, they should be able to provide your lender with a copy directly.
Here are some of the documents you or the association may be asked to provide:
- The covenants, conditions and restrictions associated with the project (This may also be referred to as the project master deed, bylaws or recorded declaration. The lender will be able to tell you what they need based on your state.)
- Budget for the condo association
- Condo questionnaire
This isn’t meant to be an exhaustive list, so other documentation may be required.
What Paperwork Will You Need To Refinance Your Condo?
To qualify for a condo refinance, you’ll need to submit personal financial information alongside the documents from your condo association.
As for documentation, your lender will use a fairly short list of documents to determine what you might qualify for, including:
- Your last two pay stubs
- W-2s from the past 2 years
- Bank statements for the last 2 months
- Your last 2 years of tax returns
Your lender will fill you in on any special documentation required for specific loan options. For example, those looking to use a VA loan will need a Certificate of Eligibility.
What You Need To Qualify To Refinance A Condo
Your lender will look at four factors before qualifying you for your condo. Those four factors are income, property, assets and credit, which you can remember by the acronym “IPAC.”
1. Income
Your income is one of the biggest factors used to determine how much you’ll be able to afford, which your lender will find by calculating your debt-to-income ratio.
Put simply, DTI is a ratio representing your monthly debt payments compared to your gross monthly income. Let’s say you gross $5,000 per month and have a car payment of $300, a student loan payment of $400, a $1,200 mortgage payment and credit card balances totaling $300. That puts your DTI at 44% ($2,200 / $5,000). To qualify for the most likely mortgage options, you’ll want to keep your DTI at or below 45%.
2. Credit
Your credit is another factor that’s incredibly important. Minimum credit scores are typically associated with each lending option. Lenders look at the lowest median score of all borrowers on a loan. All scores listed in this section represent the lowest median score necessary between Equifax, Experian and TransUnion.
3. Conventional Loans
For a conventional loan, the minimum credit score is 620. If you’re trying to get a conventional loan for new construction, it could require a FICO® of 700. Your DTI can go up to a maximum of 50%.
4. FHA Loans
The minimum FICO® Score for FHA loans on a rate-and-term refinance is 580. However, if you’re trying to qualify with a credit score at that level, you’ll have to keep your DTI fairly low. It has to be no higher than 38% before your house payment, and no more than 45% once the house payment is added in.
It’s worth noting that with a credit score of 620 or higher, you can potentially qualify with a higher DTI than you can on many other loans. You also need at least a 620 to take cash out with an FHA loan.
5. USDA Loans
You can do a rate-and-term refinance on a USDA loan with a credit score of 640 or higher. Your maximum DTI on this would be 50%.
At this time, the USDA doesn’t allow cash-out refinances, but you may still be able to secure a lower interest rate or better loan repayment term to help lower your monthly payments.
6. VA Loans
If you’re an eligible active-duty service member, reservist, member of the National Guard, veteran or qualifying surviving spouse, you may qualify for a VA loan. The VA has no minimum credit requirement, so lenders set their own guidelines.
If you’re looking to do a cash-out refinance, you can convert all of your equity into cash with a minimum score of 620. If your score is in the 580 – 619 range, you have to leave at least 10% equity in the home after the transaction. This limitation also applies if you have an ARM.
As for DTI, you can go up to 60% on a fixed loan and 50% with an ARM. The ability to qualify with higher payment amounts could help you take more cash out if desired. However, you should always consider your finances very carefully. If you have any doubts, it’s best to consult a financial advisor.
7. Assets
Lenders will take a look at any savings and other accounts you’re using to qualify. The idea here is to make sure not only that you have enough for closing costs but that you have cash reserves.
Reserves are funds you would use to make your mortgage payment if you lost your job or had another event that put a strain on your income. These are measured in months of mortgage payments and include principal, interest, property taxes, homeowners insurance and condo association dues – collectively referred to as PITIA.
Every mortgage option is different, but a good starting point is 2 months’ worth of reserves. You may need more to refinance a second home or investment property.
8. Property
Property type is particularly important when discussing loan-to-value ratio, which can be thought of as the inverse of your existing equity amount. For example, if you have 10% equity in your home after a refinance, the LTV on the loan would be 90%.
Lenders use LTV as a risk metric. The required maximum LTV may depend on factors such as the purpose of the loan (cash-out or rate-and-term), the investor in the mortgage, the borrower’s credit score and the property type (i.e., primary, vacation or rental).
9. Appraisals
The function of an appraisal is twofold. First, the appraiser is responsible for assessing the livability of the property. Could someone safely live there and be able to get full enjoyment out of it? Some of these requirements are basic, but just for the sake of example, here are a few:
- The utilities should work.
- Studs shouldn’t be exposed.
- Porches and decks should have handrails or guardrails.
The FHA places special emphasis on ensuring there’s no chipped or peeling paint in homes built before January 1, 1979. That’s because lead-based paint was commonly used at the time.
The other job of the appraiser is to assign a value to the property. The condo is serving as collateral for your mortgage, so a lender can only give you what the property is worth. This is important in a refinance because the property value is a primary determinant of how much equity you can access.
10. Loan-To-Value Ratio (LTV)
Here are some LTVs for different loan types:
- Conventional loans: For a conventional loan on a one-unit primary property, you can do a rate-and-term refinance with as little as 3% equity, and for a cash-out refinance, you’ll need 15% equity on a single unit (more for multiple units). For a second home, you can do a rate-and-term refi with as little as 10% equity, and 25% for a cash-out refi. On an investment property, you can do a rate-and-term refi on a single unit with an LTV as high as 85% (15% equity) and take cash out with as little as 25% equity.
- Jumbo loans: Jumbo loans have their own requirements and may be the right fit for certain qualified borrowers. It’s best to talk with your Home Loan Expert about your options.
- USDA loans: A USDA loan is the easiest option to explain because you can refinance up to the full value of your property. At this time, only rate-and-term refinances of one-unit condos are available.
- FHA loans: For FHA loans, you can do a rate-and-term refinance with as little as 3.5% equity left in the home. You can also take cash out as long as you leave 15% equity in the home and have a 620 credit score.
- VA loans: You can refinance the full value of your VA-backed property in order to do a rate-and-term refinance. As mentioned earlier, if you have a 620 credit score, you can also convert your full home value into cash with a VA loan. Otherwise, you must leave 10% equity in the home when you take cash out.
The Bottom Line: A Condo Refinance Can Unlock Big Benefits
Refinancing a condo is a great way to free up cash or save money over the life of a mortgage loan. Think about the type of loan that’ll work best for your needs and gather the necessary documentation as early on in the process as possible. This will help you speed up the refinance timeline and get you one step closer to saving money.
