How to refinance a condo

Posted by  on Jun 12, 2012

Condo financing is a little bit different than financing a single family home in one key way: In addition to you, your condominium association also needs to be approved for the new loan. Making sense of this process can be tricky, as the rules are a little bit different depending on whether you are applying for an FHA loan or a conventional mortgage.

Refinancing a condo with an FHA loan

FHA loans are only available for condos on an approved list, so you can check with your lender or with your condo association to see if your association qualifies. If not, your association can apply for FHA loan approval, but this process could take several weeks or longer.

FHA condominium association approvals require that:

  • More than 50 percent of the units are owner-occupied
  • Less than 15 percent of owners are behind on condo fees
  • No one owner owns more than 10 percent of all the units
  • At least 10 percent of the condo fees are held for cash reserves
  • No outstanding lawsuits exist against the condo association

If your condo association is on the FHA-approved list for a mortgage loan, you can refinance into an FHA loan, though you'll find yourself paying mortgage insurance premiums for this government-insured loan.

Refinancing a condo with conventional financing

Conventional loans have similar requirements as FHA loans, but there is not a list of approved associations like there are with the FHA. If your home equity is less than 20 percent -- a common condition for owners in today's fallen market -- you will have to pay private mortgage insurance, which could add to the cost of your monthly housing payments.

But even with mortgage insurance, refinancing could still be sensible if your interest rates fall enough or if you can manage to refinance into a shorter loan term.

Mortgage loan approvals for condo refinancing

Once you've established that your condo qualifies, you'll need to make sure you have a good credit to get the best mortgage rate. For conventional financing, you'll need a credit score of 740 or higher to do so. For an FHA loan, most lenders require a credit score of 620-640 and above. You'll also need a debt-to-income ratio of 41 percent or less, although if you have a high income, steady job history and substantial cash reserves, you may qualify with a slightly higher debt-to-income ratio.

If your condo association doesn't qualify for conventional or FHA financing, your options are limited to portfolio lenders, who typically charge a higher interest rate and sometimes higher fees. It's still worth shopping around, though, to see whether a refinance of this sort can make sense for you.

As with refinancing a conventional home, one of the most important steps when refinancing a condo is to compare mortgage quotes from different lenders. Be sure to look at the APR, not just the interest rate, so you can better compare the fees for your loan as well.


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