Condo Financing: What Lenders Check Before They Approve

Most buyers assume a condo loan works like any other loan. You qualify, the appraisal comes in, you close. With a condo there's a second borrower in the deal that nobody talks about: the association. The lender underwrites the building right alongside you, and I've watched perfectly strong buyers get stuck because a 12-unit association in Lynn had $4,000 in reserves and a master insurance policy that ran out three weeks ago.

This comes up constantly in my market. Lawrence, Lynn, and Haverhill have a huge stock of converted two and three-families that are legally condos, and those small self-managed associations are where the surprises live. Larger, professionally managed complexes in Methuen and Lynnfield tend to be cleaner, though not always.

What "warrantable" actually means

A warrantable condo is one that meets the project standards of Fannie Mae, Freddie Mac, FHA, or VA, depending on which loan you're using. Meet them and you get standard conventional or FHA pricing and down payment options. Miss one and the loan has to go somewhere else, usually a portfolio or non-QM lender, with more money down and a higher rate.

The review happens through a condo questionnaire the lender sends to the association or management company, plus the master insurance policy, the current budget, and sometimes the recorded documents and recent meeting minutes.

The items that trip up deals

Reserves. Fannie Mae wants the budget to allocate at least 10% of annual income to reserve funding, or an acceptable reserve study showing the association is funded adequately. Plenty of small self-managed associations have never put a line item in the budget at all. Sometimes they have money sitting in an account and just never wrote a budget, which is fixable with a corrected budget and a bank statement.

Delinquencies. The general standard is no more than 15% of the units 60 or more days behind on HOA dues. In a six-unit building, that's one owner. One deadbeat neighbor can push a project out of warrantability, and there's not much you can do about it in the middle of a purchase.

Owner-occupancy. For a primary residence purchase on a conventional loan, Fannie doesn't apply an owner-occupancy minimum. That surprises people. If you're buying the unit as an investment property or second home, the ratio matters, and the common threshold is at least 50% owner-occupied. FHA has its own occupancy requirements. So the same building can work for an owner-occupant and fail for an investor.

Single-entity ownership. One person or LLC owning too many units is a problem. The limits scale with project size (roughly one or two units in a very small project, and around 20% in larger ones), and they differ between Fannie, Freddie, and FHA. If a single investor bought half a converted three-family, expect trouble.

Litigation. Not all litigation is fatal. A slip-and-fall claim covered by insurance and under the policy limits is usually fine. Anything involving structural issues, construction defects, or safety is a hard stop for agency financing.

Insurance. The master policy needs adequate replacement cost coverage, a fidelity or crime bond once the project is above 20 units, and liability coverage. Deductibles that are too high relative to the coverage amount get flagged. In the last couple of years I've seen more condo master policies come back with coverage gaps because associations shopped on price after big premium increases.

Deferred maintenance and special assessments. After Surfside, Fannie and Freddie added rules on significant deferred maintenance, unfunded assessments for critical repairs, and any project under an evacuation or unsafe-structure order. Questions about the roof, the elevators, the balconies, and the structural systems are now standard on the questionnaire. If the association answers honestly that the roof is at end of life with no funding plan, the loan stalls.

Florida deserves its own note since I lend there too. State law now requires milestone inspections and structural integrity reserve studies for buildings three stories and up, and associations can no longer waive reserve funding for the covered items. That has pushed dues and special assessments up sharply in a lot of coastal buildings. If you're buying a Florida condo, ask for the milestone inspection report and the SIRS before you fall in love with the unit.

Two and three-unit condos in Lynn, Lawrence, and Haverhill

These are their own category. Two-unit condos often can't even meet the 15% delinquency test in a meaningful way, they rarely have real reserves, and the "association" is two neighbors who talk about the roof once a year. Fannie has more forgiving treatment for two to four-unit projects than most people expect, so plenty of these do go conventional. But the documentation still has to exist. Somebody has to produce a budget and a master policy that covers both units.

If you're a seller with a converted two-family unit, getting a proper budget and a current master policy in place before listing removes the single most common financing headache in that price range.

FHA is a different animal

FHA requires the whole project to be on the HUD approved condo list, with one exception: single-unit approval. That lets FHA approve an individual unit in a project that isn't approved, subject to limits on how many units in the building can be done this way and stricter tests on delinquencies, owner-occupancy, and insurance. It's a real option, and it takes extra time. If you're using FHA on a condo, have your loan officer check the HUD list before you write the offer, not after.

Non-warrantable financing exists

When a project fails the agency tests, the deal isn't dead. Non-warrantable condo programs are portfolio products that price for the added risk. Expect more down payment (commonly 10% to 25% depending on the file and the reason for the non-warrantability), a higher rate, and tighter reserve requirements. For an investor buying a unit that cash flows, a DSCR loan can also work, since those lenders generally look at the rent versus the payment and take a lighter view of project standards.

I'd rather put a client into one of those on day one than fight a warrantability battle for four weeks and then pivot with the closing date on top of us.

Practical steps before you write an offer

Ask the listing agent three things: who manages the association, whether there are any current or planned special assessments, and whether other buyers have financed there recently. If units have been closing with regular conventional or FHA loans, the project is probably fine. If everything has been cash for two years, that tells you something.

Then get the budget, the master insurance certificate, and the last two sets of meeting minutes into your lender's hands as early as possible. Minutes are underrated. That's where you find out about the roof bid nobody has voted on yet.

Build the timeline for it. A condo questionnaire turnaround of a week or two from a management company is normal, and small self-managed associations can be slower because you're waiting on a volunteer treasurer with a day job. If you're on a 30-day close in a competitive Merrimack Valley market, start the project review the day the offer is accepted.

The short version

The unit and the building get underwritten separately, and you can be a flawless borrower in a building that doesn't qualify. Find out which category the project falls into before your inspection contingency runs out, keep an eye on reserves, delinquencies, insurance, and pending assessments, and know that a non-warrantable answer means a different loan rather than no loan. Program thresholds change and vary by agency, so confirm the current numbers on your specific project rather than relying on what worked for a friend two years ago.