Fannie Mae and Freddie Mac have increased mortgage rates on Condominiums this week. If you have less than a 25% down payment, your rate may be up to .375% higher on a condominium than a house.
This is nothing new. Fannie Mae had charged higher rates for condos for many years. They’ve also had more lending restrictions when it came to condos. Freddie Mac, however, didn’t treat condos any differently than houses. Wells Fargo sells their loans through Freddie Mac and for a long time, was a preferred lender for condos. Now, both Fannie and Freddie are in line with the increase.
So why would this be? Well, condominiums have always posed higher risk than houses. I assume this recent decision was based on high foreclosure rates on condominiums. Here in Evanston, the condo market has has struggled much more than the housing market.
Funds for mortgages are short and investors willing to lend their money to homeowner’s are weary of getting a repayment. In order to make money available to the public, Fannie and Freddie have to make it worth it to the investor. Higher risk = more money.
If you are a condo buyer, you shouldn’t let this discourage you. Mortgage rates are still at historic lows and your payment may not be greatly affected. I have always advised my buyers not to worry too much about the rate when you purchase a home. Your focus should be the product – finding the right home at a good price and take the best rate you can get at the time. Once you’ve timed the right home, you are in a great position to refinance if mortgage rates come down.
Remember, purchasing a home is a long-term investment and if you do it right, it can be one of the best investments of your life. Lynn and I are first time home buyer specialists and are here to help educate you and guide you on your first home purchase.
I would love to talk more. I just came across this site. I am set to close on a home next week. I am first time homebuyer and was just getting nervous that I had to pay a higher rate since it is a condo.
I started to think I was lied to, but please pass on the specifics. I locked in at 5% on a short sale:)
Hi Jason,
Fannie Mae increased rates on condominiums a few months ago so any bank who sells a loan through them will have to charge you a higher rate than the rates you see posted if you are purchasing a condo. The fact that you are purchasing a short sale has nothing to do with your rate but if you got 5% on a condo without paying any points or additional lender fees, you got a great deal!
Best Regards,
Corinne
I have very strange but similar issue to one listed above. I’m closing townhouse purchase this Friday… bank that is giving me a loan after house inspection and appraisal informed me that my loan is going to count a Condo Loan. I’m really discouraged at this point and I decided that I will skip this deal if the rate is going to be over 6%. Anyone has encounter any problem like that in the past? by the way my down payment is 40%…
Sincerely Jacob
Hi Jacob,
Townhomes are tricky. Some of them are considered condos and others are considered single family detached units. The determining factor being who pays for the homeowner’s insurance: the association or the unit owner. If it’s the association, then it’s considered a condominium. If each unit owner pays their own, like on a house, then it’s a single family detached.
It is true that rates are higher for condominiums, however, it should only be that way if you have less than a 25% down payment. If you have 40% down, your rate should be the same as a house. Contact me with more details and I’ll quote you a rate.
Best of luck!
I have a friend who wants to purchase a patio home and just learned that it is classified as a condo due to the land belonging to the association. She is responsible for insurance but the association does take care of the outside. Where are the guidelines to determine the classifications?
Interesting Article. Thanks for the read!
I am so glad I found your website. It helps understand more. I didn’t realize condos required 25% down.
I have a question. I am buying a condo for $135K and I am able to put 20% down.
Would you say a rate of 5.28 for a $108K loan amount and two pts is reasonable?
Hi Maria,
You only need 25% down on a condo with a Conventional mortgage if you want the lowest rate or a rate similar to what you would get on a house. You CAN put as little as 5% down on condominium, you will just pay a slightly different rate. FHA allows as little as 3.5% down with no change in rate for condominiums but it has a high mortgage insurance payment that you won’t find on a Conventional mortgage.
If you have good credit scores, your rate around 5.25% with 2 points is reasonable today but you might consider not paying any points and taking closer to 5.875%. The payment difference is only $42.22 per month verses spending over $2000 to buy it down. That means it will take you 51 months or over 4 years to feel the savings. Any mortgage rate under 6% is a great rate. Determine how much time you will spend in the home and take note that most homeowner’s will refinance in the first 3 years despite the 30 year fixed low rates. You can get a few pieces of great furniture for $2000.
I am not familiar with the Home Steps program. You should ask your lender but typically points are considered closing costs and could be used to soak up credits from other parties. The chances are good that you would be able to charge the two points and if you can, I would suggest it but you should contact your lender to find out for sure.
Best of luck and congratulations on your new home!
Also, there is a Fannie/Freddie Home Steps program offered right now where buyers are offered up to 3.5% for closing costs. The max amount allowed is $4,725.
My closing costs do not add up to $4,725, but I want to take advantage of this program. I asked the lender to increase it by 2 pts and now I see a total of $4450.33 for closing costs. A difference of $274.33 will remain unused. Might you know if HomeSteps would allow me obtain a loan with 2pts and use it towards the closing? Just wondering…..
A home is typically classified as a condominium if the “master” insurance policy is paid through the association. For example, if the building burns down, the master insurance policy would cover the cost of the rebuild. This policy typically does not cover the owner’s belongings or the interior of the unit if there was damage just inside. Owner’s are advised to obtain an additional insurance policy to cover the interior of the unit commonly referred to as “Condo Insurance” or “Contents Insurance”. It is a little more than renter’s insurance as it does cover damages to the unit but is still very inexpensive.
Lender’s (Fannie Mae) determine a condo from a Single Family Residence by verifying who pays the “master policy”. If it is the association, then it is labeled a condo, if it is not and the homeowner is responsible for it, then it is considered a SFR.
Does this help?