When the market for buying homes is competitive, a cash offer can give you an advantage over other homebuyers. Once you've purchased your condo for cash, you have several options to get cash out of the equity you have in the home. Getting cash out of a home purchase has extra challenges when that home is a condo.
Cash Out Refinance
If you own a home free and clear and want to get a mortgage on the property, mortgage lenders will treat the loan as a cash-out refinancing, even though there is nothing to refinance. With this type of mortgage, expect to pay a slightly higher rate -- one-eighth to one-quarter percent more -- than the current rate for new purchase mortgages. The lender will most likely also limit the amount you can borrow to 75 or 80 percent of the condo's value. Some benefits of a cash-out refinance are that you have a three-day right to back out after signing the papers, and in the absence of a time crunch to get approved, you can shop around for the best mortgage deal.
Condo Association Approval
To obtain a mortgage on a condo, the condo association must also be approved by the lender. Fannie Mae, Freddie Mac and the Federal Housing Administration have strict guidelines concerning the ownership, fee delinquencies and completion level of a condo complex concerning whether these agencies will accept a mortgage on one of the condos in the association. Check with the condo manager and ask if the association has completed a certification approval with the housing finance agencies. If the association is not certified, it will be very difficult, if not impossible, to get a first mortgage on your condo.
Home Equity Loan
If you're unable to get a regular mortgage on your condo, a home equity loan is another option to get some cash from your equity. With this type of loan, you pay a higher rate and will probably be limited in the amount of equity you can tap -- such as 50 percent of the condo's value. Check with several banks and credit unions in your area and ask about their policies on home equity loans or lines of credit for condos.
Delayed Financing Mortgage
If you recently purchased your condo, you may be able to get a loan that is classified as a delayed financing mortgage. If you obtain the mortgage within six months of the purchase, the lender will most likely allow you to have a loan with the same terms as a purchase mortgage. The primary benefits are a lower rate and possibly higher loan-to-value limit compared to a cash-out refinance loan. Your condo association must still be acceptable to the lender.
- Bankrate: How to Jump Through Condo Loan Hoops
- The Mortgage Professor: Mortgage to Purchase or Afterwards?
- Wall Street Journal: Home Buyers Do the Mortgage Time Warp
- The Mortgage Reports: Delayed Financing Rule: Pay Cash for a Home, Cash-Out Refi Next Day
- National Council of State Housing Authorities. "FHA Issues New Review Requirements for Condominium Loans." Accessed May 11, 2020.
- First Heritage Mortgage. "What Is a Non-Warrantable Condo?" Accessed May 11, 2020.
- United States Government. "Code of Federal Regulations: Title 24, Housing and Urban Development. Part 234, Condominium Ownership Mortgage Insurance." Accessed May 11, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.