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Yes, you can get a home equity loan on a condo. But your lender will also consider the condo association’s finances when evaluating your application. If the lender views the association as risky, you could be rejected.
While the home equity market has tightened over the past decade, this doesn’t mean you can’t get a home equity loan — or home equity line of credit — on a condo. We cover the nuances of getting home equity financing for your condo.
- Who offers home equity financing for condos?
- Which type of home equity financing should I get on my condo?
- I own my condo. Why can't I get the lender to give me a loan?
- Alternatives to home equity financing for your condo
Who offers home equity financing for condos?
Various credit unions, banks and mortgage loan companies offer home equity financing for condos. A credit union or regional bank could be a good starting point since it has an understanding of local markets and often provides a high level of customer service.
Condo financing applications can be more involved, as your condo association needs to submit answers to a questionnaire regarding its financial health. With a single-family home, you need to complete an application, submit documentation and get the required appraisal and inspections, but you don’t have a similar questionnaire. To keep the process from stalling, it helps to work with a lender who is readily available to answer questions and who is willing to push things through as needed.
Whether you start with a local bank, mortgage broker or another institution, you should ask if it offers home equity financing for condos. Some lenders don’t offer home equity products, while some lenders may only offer financing for a condo if it is warrantable.
Warrantable means the condo association meets guidelines set by Fannie Mae, the Federal Housing Agency (FHA) or the Department of Veteran Affairs (VA) for financial stability. The more stable the condo association is, the less risk there is for the lender. If you used an FHA loan, VA loan or conventional financing to purchase your condo, it likely is warrantable.
Lenders will also closely scrutinize the underlying financing of the property, whether the condo association has any litigation pending and whether there are any planned special assessments.
Be prepared to contact several lenders — and ask upfront about lender requirements for home equity loans and HELOCs for condos.
Which type of home equity financing should I get on my condo?
Home equity loans and HELOCs can be helpful for things like home repairs or consolidating debt, but which one is best depends on your situation. Remember that both use your condo as collateral for the loan. That means if you don’t pay the loan, the lender can foreclose on your condo.
Home equity loan
A home equity loan provides a lump sum of cash based on a percentage of the equity in your home (typically up to 85%). It typically has a fixed interest rate, which means that you have predictable payments over the life of the loan. Home equity loans often have terms of five to 15 years. If you know you’re going to consolidate a certain amount of debt or if you know how much your home repairs will be, a home equity loan is a good option because you can take out a loan for how much you need.
Home equity loans have drawbacks, too. One downside is that if you don’t need the amount you borrowed, you still have to pay back the lump sum. Another downside is that you will pay closing costs, which typically are between 2-5% of your loan amount.
Meanwhile, a HELOC works more like a credit card. You are approved for a line of credit, but you only withdraw it as you need it. Many HELOCs have draw periods, during which you can borrow against your credit line while making minimum payments. Once your draw period ends, you may be required to pay the full balance, though many lenders allow a repayment period to pay off your balance. You can no longer borrow from your credit line during your repayment period. Draw periods are typically 10 years, while repayment periods are often 15 to 20 years, though they may be longer.
If you aren’t sure how much you need or if you’re using it to pay for educational expenses, a HELOC might be a better fit than a home equity loan. HELOCs often have variable interest rates, which means your payments could increase or decrease, affecting your ability to budget properly. You’ll also pay closing costs for a HELOC like you would with a home equity loan.
Regardless of which option you choose, make sure to get multiple quotes to ensure you’re getting the best deal possible on a home equity loan or HELOC for your condo.
I own my condo. Why can't I get the lender to give me a loan?
Depending on your financial health and the financial health of the condo association, you might struggle to get financing. Not being able to get financing is a frustrating experience, especially if you own your condo or co-op.
If you’re having a hard time finding financing, consider the following factors:
Your financial health
If you own a condo but have less-than-stellar credit, you’ll have a more difficult time securing financing. A credit score of 760 or better is ideal, but you may be able to get financing with a score of at least 620. If your credit score is less than ideal, take some time to improve it before applying for home equity financing.
The development’s well-being
Does your homeowner's association have the funds to cover emergencies? Are other condo owners paying their condo fees on time? Are the units in your development investment properties or primary residences? These — and more — will factor into whether a lender will extend financing.
The home equity market
The home equity market took a serious downturn after the 2008 financial crisis, and it hasn’t completely rebounded. According to the Black Knight Mortgage Monitor, HELOC lending in the first quarter of 2019 dropped by 18% both quarter over quarter and year over year, while HELOC withdrawals hit a five-year low. Some lenders are still reluctant to dip their toes back into the home equity market, which makes things more challenging for borrowers.
Alternatives to home equity financing for your condo
If you’re having trouble finding home equity financing for your condo — or if it sounds like too many hoops to jump through — you have other options.
Home equity loans take a back seat to your primary mortgage. If something goes wrong, you will pay your mortgage before you pay your home equity loan. With a cash-out refinance, you get a new mortgage and cash out a portion of your equity as a lump sum. You might even be able to secure better terms than your original mortgage. A downside to a cash-out refi is that you have to pay closing costs.
If you need emergency funds, you could consider applying for a credit card with a 0% introductory APR for purchases. One drawback to credit cards is that they often have a higher interest rate than home equity products once your introductory period ends, so it’s best to pay down your balance as much as possible before your APR increases. Another drawback is that maintaining a balance of more than 30% of your credit line can hurt your credit score.
With a personal loan, the lender will only look at your financial situation — not that of your condo development. You also don’t have to use your home as collateral. You may not be able to borrow as much as you could have with a home equity product, though, depending on the equity in your home. Personal loans typically top out at $100,000. To get the best interest rates, you need to have good-to-excellent credit. Even if you don’t have great credit, you may still be able to obtain a personal loan, but you will likely pay more in interest.