Condos and Doctor Loans
Star-crossed lovers or a match made in heaven?
Condominium living can be great for folks who love living in community and who don’t want to deal with a lot of exterior property maintenance. You simply pay your HOA (Home Owners Association) fees each month, and someone else takes care of your lawn, fixes your roof, and cleans the pool. Condos are awesome . . . unless you’re trying to get a mortgage on one. That’s when things can get a little complicated. But the good news is that some doctor loans can be used to purchase condos.
Why is getting a mortgage on a condo more complicated than on a single family home?
Condos are special creatures because with condos you only own the “air space” within the “boundaries of the home.” Or, in terms that the rest of us can understand—basically you own the inside but not the outside of your condo. Since the exterior of your home, your yard, and any common areas are co-owned by you and all your neighbors, your mortgage lender is not just betting on you but also banking on your entire condominium community. What happens if some of your neighbors just stop paying their HOA dues? What about if your condominium association gets wrapped up in a legal dispute with the developers who didn’t build something to code? You can see how this co-ownership model could get pretty complicated pretty fast, and why banks are sometimes less than jazzed about taking a risk on a condo.
Can Doctor Loans be used on a Condo?
When it comes to doctor loans, some programs have a complete ban on condos. They won’t touch them with that ten-foot pool the pool guy uses to clean your condo community’s pool. The good news is that most doctor loans are willing to help you buy a condo, so long as it’s “warrantable.”
So, what exactly is a warrantable condo?
Basically, a warrantable condo is one that has been blessed by the government. In other words, the condo has met the guidelines that make a mortgage on that condo eligible to be resold to Fannie Mae or Freddie Mac. That’s the short answer.
Now for those of you who haven’t fallen asleep yet, here’s my longer summary of how the “powers that be” decide whether a condo is warrantable or non-warrantable:
How they determine whether a condo is warrantable or non-warrantable
First, they verify that the entire condominium project (including all common areas) has been fully completed and is insured. They also check to make sure that your HOA isn’t involved in any legal disputes.
Next, they want to see that the condominium owners are invested in the place and planning for the future. They judge that by whether or not a majority of the units are owner-occupied and whether or not those homeowners have been delinquent in paying their HOA dues. If more than 15% of the owners haven’t been paying their fees, then they won’t bet on your community. The “powers that be” also require that 10% of the monthly HOA dues be set aside as “replacement reserves,” so that you have money squirreled away to fix that pool pump when it breaks.
Finally, they want to see that the community is more or less democratic. This is America after all. That means that the same person can’t own more than 10% of the units. Also, the HOA must be controlled by the condo owners (as opposed to the developers), and they don’t want to see more than 25% commercial space in the area.
If your condominium community can meet all of those requirements, then your condo will usually be deemed “warrantable.” And since it is considered warrantable, that means that the mortgage lender can always sell your loan to one of the secondary mortgage market institutions, such as Fannie Mae or Freddie Mac. If lenders have this option, then they are taking less of a financial risk in offering their doctor loans.
What about non-warrantable condos?
If, however, your condo doesn’t conform to the lending guidelines of Ms. Mae or Mr. Mac, then the bank can’t sell it on. Your mortgage is considered a “nonconforming loan” and must be held in the lender’s own investment portfolio. So, you see why a non-warrantable condo is an even riskier investment for a lender.
Now, here’s the good news. Since many of the doctor loans are specialty loans already that the lender intends to keep “in house,” in their own investment portfolio, some of them are willing to take a risk on a non-warrantable condo (I mean, they’re already taking a risk by offering 100% financing to young doctors who have some serious educational debt, so why not add a non-warrantable condo on top, right?).***
So never fear if you fall in love with a non-warrantable condo. Just make sure to reach out to one of the mortgage lenders below who believe that true condo love conquers all and are willing to take a gamble on you:
***Do keep in mind that even if you can use your doctor loan to purchase a non-warrantable condo, unless your condo becomes “warrantable” before you resell, then the next person who wants to buy your condo may not be able to get a loan to do so. Then there goes that sale.