Why Can a Condo Be Hard to Finance Even When the Buyer Qualifies?

Here's one of the strangest conversations I have with homebuyers.

They've got excellent credit.

Strong income.

Plenty of money for the down payment.

Their debt-to-income ratio works.

They find a condo they love.

And then I tell them:

We still need to qualify the building.

That's the part many buyers—and sometimes sellers—don't realize.

When you buy a single-family home, most of the underwriting revolves around you and the property itself.

With a condo, there's another layer.

The condominium project matters too.

And that can turn an otherwise straightforward mortgage into a much more complicated transaction.

You Aren't Just Buying the Unit

When you purchase a condominium, you aren't simply buying the space inside your walls.

You're also buying into an association.

That association may be responsible for:

The roof.

Exterior.

Elevators.

Pool.

Parking structures.

Balconies.

Common plumbing.

Landscaping.

Insurance.

Structural maintenance.

And potentially millions of dollars of future repairs.

That means the financial condition of the HOA can matter to a mortgage lender.

The buyer might be financially bulletproof.

The building might not be.

The Condo Market Is Running Into a Bigger Problem

This isn't just theoretical.

Recent reporting has highlighted condo owners around the country having difficulty selling because rising HOA costs, insurance problems, special assessments and aging infrastructure are making some units less attractive—and sometimes more difficult to finance.

That's especially important in California.

Condos are supposed to be one of the primary entry points into homeownership.

Someone may not be able to afford a $1.3 million single-family home.

But perhaps they can afford a $700,000 condo.

That's exactly why I've been talking so much about California's shortage of starter homes.

The problem is:

A lower purchase price doesn't automatically mean an easier transaction.

Insurance Can Become a Mortgage Problem

Insurance is one of the first things I want to understand.

A condo project typically has a master insurance policy covering certain portions of the building or development.

Mortgage guidelines can require that coverage to meet specific standards.

If the association has inadequate coverage—or can't obtain appropriate coverage—the financing can become difficult.

That's frustrating because the buyer may have absolutely nothing to do with it.

They could have an 800 credit score.

It doesn't fix the building's insurance policy.

Reserves Matter

Imagine your HOA collects exactly enough money each month to pay today's bills.

Sounds efficient.

Until the roof needs replacing.

Or the balconies need repairs.

Or the plumbing fails.

Or the parking structure needs millions of dollars of work.

A healthy association generally needs to plan for future expenses.

That's where reserves come in.

The reserve account is essentially money being accumulated for major future repairs and replacements.

When reserves are inadequate, the association may have to turn to homeowners.

That's when you start hearing the two words condo owners hate:

Special assessment.

The $50,000 Surprise

We talked about this recently.

Imagine buying a condo and discovering the HOA needs a major structural repair.

Your portion:

$50,000.

Maybe the HOA allows payments.

Maybe it doesn't.

Maybe there's financing.

Maybe there isn't.

But now you've got another substantial financial obligation tied to the property.

And potential buyers will want to know about it too.

That's why I tell condo buyers:

Don't just ask:

“What's the HOA payment?”

Ask:

“What's the financial health of the HOA?”

Those are completely different questions.

Litigation Can Matter

Another issue is litigation.

Suppose the HOA is suing the developer.

Or a contractor.

Or an insurance company.

Or perhaps the association itself is being sued.

Depending on the nature of the litigation and applicable loan guidelines, financing may become more complicated.

Again, the buyer didn't do anything wrong.

The seller didn't necessarily do anything wrong.

But the project now has an issue that has to be evaluated.

Deferred Maintenance Matters

This is another major issue, especially with older buildings.

A building can look beautiful inside the unit.

New kitchen.

New floors.

Fresh paint.

Amazing view.

But what's happening outside?

Roof?

Balconies?

Foundation?

Plumbing?

Elevators?

Electrical?

Structural components?

A beautiful remodeled kitchen doesn't compensate for a building facing enormous deferred-maintenance costs.

That's why the project review matters.

Delinquencies Can Matter Too

An HOA depends on homeowners paying their dues.

If too many owners aren't paying, the association may have a cash-flow problem.

That can affect its ability to:

Maintain the property.

Fund reserves.

Pay insurance.

Complete repairs.

Meet other financial obligations.

And depending on the financing program, HOA delinquency levels can become part of the project review.

This Is Why Condo Financing Can Feel Weird

The buyer calls me and says:

“Mike, I make $300,000 a year. Why does any of this matter?”

Because you're not buying an isolated box floating in the air.

You're buying a piece of a larger financial entity.

The mortgage is secured by your unit.

But the value and marketability of that unit can be affected by what happens to the entire project.

That's why lenders care.

What Is a Non-Warrantable Condo?

You'll hear the phrase non-warrantable condo in mortgage conversations.

In simplified terms, it generally refers to a condominium project that doesn't meet certain conventional agency eligibility requirements.

That does not necessarily mean:

Bad building.

Bad investment.

Unsafe property.

Impossible to finance.

It means conventional agency financing may not work under the applicable circumstances.

That's an important distinction.

Because there are situations where alternative financing may be available.

This is one of the reasons our condo desk is so valuable.

Instead of looking at a project and immediately saying:

“No.”

I want to know:

Why doesn't it qualify?

Then we determine whether another financing path exists.

Don't Wait Until Day 10 of Escrow

This is probably my biggest piece of advice.

If you're seriously considering a condo:

Get the project looked at early.

Especially if anything seems unusual.

High HOA dues.

Large assessment.

Pending litigation.

Insurance issue.

Mixed-use development.

Investor concentration.

Commercial space.

Condotel characteristics.

Major deferred maintenance.

Unusual ownership structure.

Don't wait until the buyer has spent money on inspections and appraisal and everybody is emotionally committed to the transaction.

Find out what you're dealing with.

Sellers Should Care About This Too

This isn't only a buyer issue.

Imagine owning a condo worth $800,000.

You decide to sell.

You get a great buyer.

The buyer qualifies easily.

Then the lender reviews the HOA.

Problem.

Buyer Number Two comes along.

Same thing.

Eventually the market starts noticing.

If fewer buyers can finance units in the project, that can potentially affect marketability.

So condo owners should pay attention to their HOA even if they aren't planning to sell tomorrow.

Read the meeting minutes.

Look at the budget.

Understand the reserves.

Know about major repairs.

Pay attention to insurance.

Know whether litigation exists.

The HOA isn't some annoying company that sends you a bill every month.

It's part of your investment.

California Has a Bigger Condo Problem

This connects directly to something we discussed last week.

California desperately needs attainable ownership opportunities.

But condo construction has fallen dramatically from early-2000s levels, and a California legislative effort intended to address construction-defect litigation concerns died at the end of this year's session.

That means the existing condo inventory becomes even more important.

We need those properties to remain financeable.

Because for many first-time buyers, the alternative isn't:

Condo vs. single-family home.

It's:

Condo vs. continuing to rent.

Condo Buyers Need Two Pre-Approvals

Not literally two loan approvals.

But conceptually, that's how I think about it.

First:

Can the buyer qualify?

Income.

Assets.

Credit.

Debt.

Down payment.

Then:

Can the property qualify?

Project eligibility.

Insurance.

HOA.

Reserves.

Litigation.

Assessments.

Property characteristics.

You need both sides to work.

What I Want Before You Write the Offer

If you're an agent working with a condo buyer, send me the listing.

If there are HOA documents available, even better.

Tell me anything unusual that you already know.

Then let's determine whether there are obvious red flags before everybody gets deep into the transaction.

Sometimes it's completely straightforward.

Sometimes conventional financing works.

Sometimes FHA or VA might be relevant depending on the project and buyer.

Sometimes alternative/non-warrantable condo financing may be needed.

And sometimes there's a problem that needs to be solved before anyone should move forward.

The Bottom Line

Condos remain one of the most important paths into California homeownership.

But buyers need to understand something:

You aren't just buying the condo.

You're buying into the HOA.

Its insurance.

Its reserves.

Its maintenance.

Its financial decisions.

Its problems.

And potentially its future expenses.

That's why an incredible borrower can still run into a difficult condo transaction.

We aren't only underwriting the person.

We're underwriting the building too.

FAQ

Can I qualify for a mortgage but still be unable to finance a particular condo?

Yes. Borrower qualification and condo-project eligibility are separate parts of the transaction.

Does a non-warrantable condo mean the building is bad?

Not necessarily. It generally means the project doesn't meet certain agency eligibility requirements. Alternative financing may sometimes be available.

Can an HOA special assessment affect financing?

Potentially. The nature, amount and circumstances of an assessment can matter during project review.

Can HOA insurance affect my mortgage?

Yes. The project's master insurance coverage can be an important part of condo financing eligibility.

When should the HOA be reviewed?

As early as possible. Identifying potential project issues before you're deep into escrow can save time, money and frustration.

Great credit doesn't guarantee condo financing. Learn how HOA insurance, reserves, assessments, litigation and project eligibility can affect a condo mortgage.