Buying a Condo in Orange County: What is Different About the Loan

When you buy a condo, you are not just buying a unit. You are buying into a homeowners association (HOA) that governs the entire complex. Lenders care about the financial health of the HOA because if the HOA is in trouble, it affects the value and marketability of your unit.

Here is what I would want you to know: condo loans have an extra approval step that single-family homes do not. The lender has to approve not just you and the unit, but the condo project itself. This can add time and complexity to the loan process.

Condos fall into two categories: warrantable and non-warrantable. A warrantable condo meets the guidelines of Fannie Mae and Freddie Mac (the agencies that buy most conventional loans). A non-warrantable condo does not meet those guidelines, which means fewer lenders will finance it and the rates may be higher.

A condo may be non-warrantable if: one person owns more than 10 percent of the units, the HOA is involved in litigation, more than 15 percent of units are delinquent on HOA dues, the complex is primarily a rental (not owner-occupied), or the HOA does not have adequate reserves. I can check whether a specific condo is warrantable before you make an offer.

If you are using an FHA loan, the condo project must be on the FHA-approved condo list. FHA maintains a list of approved condo projects, and if the one you want is not on it, you cannot use an FHA loan for that unit.

Here is what I would do if I were you: before you fall in love with a condo, ask me to check if it is FHA-approved. If it is not, we can talk about conventional options (which have more flexible condo requirements) or look at other complexes that are FHA-approved. I can check any condo project in Orange County for you.

Conventional loans have more flexible condo requirements than FHA. Most condos qualify for conventional financing, but the lender still needs to review the HOA documents. They will check the HOA budget, reserves, owner-occupancy ratio, and any pending litigation.

The lender typically orders a condo questionnaire (filled out by the HOA management company) that covers these items. The questionnaire costs $100 to $300 and is part of your closing costs. If the questionnaire reveals issues (like low reserves or pending litigation), the lender may decline the loan.

VA loans also require the condo project to be VA-approved. The VA maintains its own list of approved condo projects. If the project is not on the VA list, you cannot use a VA loan for that unit.

However, the VA condo approval process has been streamlined in recent years, and more projects are being approved. I can check whether a specific condo project is VA-approved and help you find VA-approved complexes in Orange County if you are a veteran.

When you buy a condo, the HOA monthly dues are part of your housing payment and are factored into your DTI. If the HOA dues are $400 per month, that is $400 less you can spend on your mortgage payment, which reduces your purchasing power.

Here is what to watch for: HOAs that have recently raised dues significantly (may indicate financial problems), HOAs with low reserves (may need a special assessment), and HOAs with pending litigation (can make the condo non-warrantable). I review the HOA documents with you before you commit.

Also, some HOAs have restrictions on renting your unit. If you plan to rent the condo out in the future, check the HOA bylaws for rental restrictions before you buy.

Here is my checklist for condo buyers. First, ask me to check if the condo is FHA-approved or VA-approved (if you are using those loan types). Second, review the HOA dues and factor them into your monthly payment and DTI. Third, ask for the HOA budget and reserves (your agent can request these from the HOA).

Fourth, check the owner-occupancy ratio (the percentage of units that are owner-occupied vs. rented). Lenders typically want at least 50 percent owner-occupied. Fifth, check for pending HOA litigation, which can kill the loan. Sixth, review the HOA bylaws for rental restrictions if you plan to rent in the future.

I help you with all of this. Before you make an offer on a condo, call me and I will check the project for loan eligibility. This can save you from making an offer on a condo that you cannot finance.