How Much Does a Person Need to Put Down on a Condo?

The housing market crash in the first decade of the 21st century took condominium properties down also. With many available on the market, buying one may be a good investment, but qualifying for a condo mortgage is complicated. Not only do you need good credit, but the building you’re buying into must be approved by the Department of Housing and Urban Development’s Federal Housing Administration arm. Do your homework on the condominium building and the loans available for a condo purchase before calculating your down payment.

As a result of the many condominiums that went into foreclosure in the housing market crash, the Federal Housing Administration stepped in and set guidelines for lending on condominiums. Every building must meet specific requirements before it becomes FHA approved. All lending institutions, including conventional lenders, look to those guidelines as the benchmark for loaning against a condominium. If the building you’re interested in isn’t FHA approved, plan on either paying a minimum of 50 percent down, or walking away from an unsound investment.

If your credit is above 620 and your debt-to-income ratio is below 43 percent, you may qualify for an FHA loan -- if the building is FHA approved. The minimum down payment required is 3½ percent, based on the purchase price of the unit. You’ll pay monthly mortgage insurance for the life of the loan unless you make a down payment of at least 20 percent. The mortgage insurance cost is factored into your debt-to-income calculation before lending is approved.

A loan package backed by Fannie Mae only is called the Conventional 97. The loan requires a minimum of 3 percent down. These loans cover condominiums as well as townhouses, co-ops and row houses, in addition to single-family detached homes. Private mortgage insurance is required, but unlike an FHA loan, the insurance is paid until the condo reaches a loan-to-value ratio of 80 percent, meaning your equity is 80 percent of the property’s value. A credit score of 680 is required if you’re making the down payment from your own funds, and your debt-to-income ratio must be 45 percent or below. A credit score of 740 is required if the down payment is a gift, and your debt-to-income ratio must be 41 percent or lower.

Conventional lenders use the FHA guidelines to qualify buyers and the condominium buildings. With a 20-percent down payment, and a low debt-to-income ratio, many lenders ease their restrictions slightly regarding the building qualifications. A down payment of less than 20 percent requires mortgage insurance. Conventional lenders issuing loans backed by Fannie Mae or Freddie Mac on a purchase with less than a 25-percent down payment require borrowers to pay points against the loan and a slightly higher interest rate.

If you’re a veteran or are on active duty service, you may qualify for a VA loan. No down payment is required, and no mortgage insurance is instituted on approved condominiums. You’ll pay a funding fee for the mortgage at a rate that de-escalates according to the amount of money you use as a down payment. The highest fee, over 3 percent of the purchase price, is charged if you opt for no-down payment. Shop for a VA loan, as different lenders have different charges for loans.