The Realities Of Condo Lending: Challenges And Opportunities

Buying a condo comes with unique lending challenges that many buyers don’t expect. Lenders look beyond your credit score—they examine HOA financials, reserve funds, and even pending lawsuits before approving a loan. If you don’t prepare in advance, you could face unexpected denials and financing hurdles.

This Essential Guide will walk you through everything you need to know to avoid condo financing pitfalls and successfully close on your condo purchase.

Table of Contents

• Why Condo Lending Is More Complicated Than Single-Family Homes
• Challenges with Lending in Mixed-Use Condo Buildings
• Fannie Mae & Freddie Mac: Condo Warrantability Rules
• The Rising Challenge of HOA Financial Health
• Alternative Financing for Non-Warrantable Condos
• Real-World Examples of Condo Financing Pitfalls
• Tips for Buyers & Sellers Navigating Condo Lending

Condo lending is one of the most misunderstood aspects of real estate financing. What seems like a routine mortgage approval can be derailed by factors completely outside of a buyer’s control—like HOA finances, investor ratios, or litigation. Knowing these risks upfront can mean the difference between closing smoothly or losing out on a dream condo.

That’s why before I ever take a buyer to see a single property, we handle financing first. I require all buyers to get pre-approved or provide proof of funds before scheduling any showings. This step isn’t just about knowing your budget—it’s about ensuring we’re only looking at properties that align with lender requirements, avoiding unexpected financing roadblocks later.

I work hand in hand with my buyers’ lenders throughout the process, staying in close communication to anticipate potential issues before they arise. If a buyer doesn’t have a preferred lender, I can provide recommendations for professionals with a strong track record in condo lending. Taking this step on the front end makes the back end of the transaction much smoother, reducing stress and positioning my buyers for success when it’s time to make an offer.

Understanding the Complexities of Financing a Condo Purchase

Purchasing a condominium isn’t just about securing a mortgage—it’s about meeting the strict financial and structural requirements that lenders demand. Unlike single-family home financing, where the focus is primarily on the borrower, condo lending requires a deep dive into the building’s financial health, governance, and overall risk factors.

Lenders scrutinize occupancy rates, litigation history, and HOA reserves before determining if a condo is eligible for traditional financing. These additional layers of approval often lead to unexpected obstacles, causing financing delays or even outright denials. Whether you’re a first-time buyer, seasoned investor, or luxury condo buyer, understanding these challenges upfront can help you navigate the process with confidence and secure the right financing without surprises.

Know Your Financing Before You Start Your Search

The smartest move any condo buyer can make is securing financing before beginning the property search. By getting pre-approved, buyers gain a clear understanding of their borrowing power, loan options, and property eligibility, ensuring they focus only on condos that meet lender guidelines. This step helps avoid wasted time, prevents unexpected deal-breakers, and provides a stronger negotiating position when making an offer. A proactive approach to financing not only streamlines the process but also reduces stress by eliminating surprises that could derail a purchase at the last minute.

Why Condo Lending Is More Complicated Than Single-Family Home Loans

Many buyers assume that if they qualify for a mortgage, they can purchase a condo without issue. However, condo financing is a two-part approval process, requiring both borrower and building approval—a key distinction from single-family home lending. 

Even if a buyer has an excellent credit score, stable income, and sufficient assets, their loan can be denied due to issues with the condo building itself. This two-step approval process means not all condos qualify for traditional financing, which is why it’s critical for buyers to research both their loan eligibility and the building’s financial health before making an offer.

The Dual-Approval Process

Borrower Approval: Lenders assess the buyer’s financial health, just as they would for a house purchase. This includes evaluating:

• • Credit score (higher scores typically yield better loan terms)
  • Debt-to-income (DTI) ratio (lenders usually require a DTI below 45%)
  • Stable income and employment history
  • Down payment and reserve requirements

Building Approval: Unlike single-family homes, condos require an additional layer of scrutiny. Lenders examine the entire condo development’s financial and structural stability, focusing on:

• • Owner-occupancy rates (many lenders require at least 50% owner-occupied units)
  • HOA reserves and budget allocations (at least 10% of the budget should be in reserves)
  • Litigation history (pending lawsuits, especially related to construction defects, can be deal-breakers)
  • Delinquency rates (if more than 15% of owners are behind on HOA dues, the loan could be denied)

Lender Insight: “We see condo deals fall through all the time because buyers assume they’re only being underwritten individually. If a building has a high delinquency rate or a pending lawsuit, we often can’t approve the loan, even if the borrower is well-qualified.”

Challenges with Lending in Mixed-Use Condo Buildings

Mixed-use buildings, where residential condos are combined with retail, office, or hotel spaces, present unique financing challenges. While these developments offer convenience, walkability, and urban appeal, they also introduce risk factors that make lenders hesitant. Since a portion of the building’s financial health is tied to commercial tenants, lenders view these condos as riskier investments.

Why Mixed-Use Condos Are Harder to Finance

• • Commercial Space Limitations: Conventional lenders typically cap commercial space at 25-30% of the total building area. If the commercial component exceeds this threshold, the condo is considered non-warrantable, meaning it won’t qualify for Fannie Mae or Freddie Mac loans. This forces buyers to seek portfolio loans or private financing, which often come with higher down payments and interest rates.
  • HOA Reliance on Commercial Income: If a significant portion of the HOA’s budget depends on revenue from retail or office leases, lenders may consider the building financially unstable. If businesses struggle or vacate, HOA dues may increase to cover lost income, which poses a financial risk to condo owners and lenders alike.
  • Tenant Turnover & Lease Issues: Unlike single-family homes or purely residential condos, mixed-use developments are subject to the ebb and flow of commercial real estate trends. If businesses fail, relocate, or break their lease, it can lead to financial instability within the building, making lenders wary.
  • Hotel & Short-Term Rental Influence: Some mixed-use buildings incorporate hotel units or allow a high percentage of short-term rentals (e.g., Airbnb, VRBO). Many lenders see this as a red flag because transient guests don’t maintain the same level of care as full-time residents, and rental income can be highly unpredictable.

Financing Options for Mixed-Use Condos

Because many large banks and mortgage lenders won’t finance mixed-use condos through traditional means, buyers often need to explore alternative financing options:

• • Portfolio Loans: Issued by banks that keep the loan on their books instead of selling it to Fannie Mae or Freddie Mac, offering more flexibility in lending criteria.
  • Non-Warrantable Condo Loans: These loans are specifically designed for buildings that don’t meet conventional lending requirements, though they often require higher down payments (20-30%) and come with higher interest rates.
  • Private Lenders & Local Banks: Some regional banks or private lenders are more comfortable financing mixed-use properties, especially if they understand the local market dynamics and commercial tenant stability.

Lender Insight: “Mixed-use condos are tough because lenders view them as riskier investments. If a retail tenant defaults, it could impact the building’s financial health, which in turn affects condo owners. That’s why conventional lenders shy away.”

First-Time Condo Buyers: FHA & VA Loan Challenges

Government-backed loans like FHA and VA are popular among first-time buyers due to their lower down payments and flexible credit requirements. However, securing financing through these programs comes with additional hurdles, especially when buying a condo. The biggest challenge? The shrinking number of FHA and VA-approved condos across the country.

Key FHA restrictions include:

• • The condo development must be on the FHA-approved list, which many are not.
  • At least 50% of units must be owner-occupied to qualify for financing.
  • A single entity (such as an investor or developer) cannot own more than 10% of the units.
  • The HOA must maintain strong financial reserves and low delinquency rates.

Lender Insight: “FHA financing is great for first-time buyers, but the problem is, so few condos are FHA-approved. We tell buyers to check the FHA list before falling in love with a unit—many find out too late that they can’t get financing.”

What Can FHA Buyers Do?

• • Check the FHA-approved condo list early: Before starting your search, use the FHA lookup tool to verify eligibility.
  • Consider alternative financing options: If a condo isn’t FHA-approved, buyers may need to explore conventional loans with low down payment options or portfolio loans.
  • Work with a knowledgeable real estate agent: Agents experienced in condo sales can help identify FHA-approved properties before you waste time on ineligible units.

VA Loan Challenges for Condos

Veterans and active military members looking to use VA financing face similar challenges, as VA condo approvals are even more restrictive than FHA. To qualify for a VA loan, the entire condo project must be VA-approved, which significantly reduces available options.

Key VA restrictions include:

• • The entire condo development must be approved by the VA, not just individual units.
  • The condo must have strong HOA financials with sufficient reserves.
  • Low delinquency rates are required—too many late HOA payments can disqualify a building.

Lender Insight: “A lot of veterans assume they can use their VA benefits to buy any condo, but that’s not the case. The entire building must be VA-approved, and approval can take months if it’s not already on the list.”

What Can VA Buyers Do?

• • Check the VA-approved condo list early: Use the VA condo lookup tool before touring properties.
  • Request VA approval for a condo: If a desired building isn’t approved, the buyer (or lender) can submit a request—but this process can take several months.
  • Look into alternative financing: If VA approval isn’t feasible, some military buyers opt for conventional loans with low down payment programs instead.

Fannie Mae & Freddie Mac: Condo Warrantability Rules

For a condo to qualify for conventional financing, it must meet the warrantability requirements set by Fannie Mae and Freddie Mac. These rules exist to ensure that condo buildings are financially stable and well-managed, reducing the risk of foreclosures or costly special assessments for owners. If a condo fails to meet these criteria, it is deemed “non-warrantable,” meaning buyers must secure alternative financing options, which often come with higher down payments and stricter lending terms.

Here’s a breakdown of the key warrantability factors and why they matter:

Why Lenders Care About Owner-Occupancy Rates

Lenders prefer condo buildings with a high percentage of owner-occupied units because owners typically take better care of the property, participate in HOA management, and provide more financial stability than tenants. If too many units are owned by investors who rent them out, the risk profile of the building increases, making it harder to finance.

Requirement: At least 50% of units must be primary residences or second homes.

Common Issue: Some buildings in high-rental markets (such as vacation destinations or urban areas) may have too many investor-owned units, making them non-warrantable.

Lender Insight: “If too many units are investor-owned, lenders see the building as a commercial property rather than a residential one. That increases risk and makes it harder for buyers to get financing.”

The Importance of HOA Reserve Funds

A condo’s financial stability is just as important as a borrower’s personal finances. Lenders carefully review HOA budgets and reserves to ensure the association is saving enough for future repairs and emergencies. Without sufficient reserves, owners could be hit with massive special assessments—which could lead to delinquencies, foreclosures, or financial instability in the building.

Requirement: The HOA must allocate at least 10% of its annual budget to reserves.

Common Issue: Many HOAs fail to save enough in reserves, especially in older buildings where maintenance costs are high. Some associations keep monthly dues artificially low, which looks good on paper but can lead to sudden financial crises.

Lender Insight: “A well-run HOA is crucial for condo warrantability. If a building isn’t setting aside enough in reserves, it signals that special assessments or financial trouble may be coming.”

Why Delinquency Rates Matter to Lenders

Lenders view high delinquency rates as a sign of financial instability within a condo community. If too many owners fall behind on HOA dues, it raises concerns about whether the HOA can cover its operating expenses, fund maintenance projects, and avoid financial strain.

Requirement: No more than 15% of unit owners can be behind on HOA dues.

Common Issue: In buildings where many owners are struggling financially, lenders may assume the risk of foreclosures and unpaid assessments is too high to justify lending.

Lender Insight: “If a building has more than 15% of owners behind on their dues, we won’t touch it. That’s a huge red flag for financial instability, and Fannie and Freddie simply won’t back those loans.”

How Pending Litigation Can Derail Financing

Lenders are extremely cautious about condo buildings that are involved in lawsuits, as litigation can indicate serious structural, financial, or governance issues. Not all lawsuits are deal-breakers, but if the case involves major construction defects, HOA mismanagement, or financial disputes, lenders will often decline financing outright.

Requirement: No major pending litigation related to construction defects, financial instability, or HOA governance.

Common Issue: Buildings that sue developers over defects—such as leaky roofs, cracked foundations, or fire safety issues—often struggle to secure financing until the case is resolved.

Lender Insight: “A pending lawsuit doesn’t automatically disqualify a condo, but if it’s related to major structural or financial issues, lenders will back out fast.”

Fannie Mae and Freddie Mac’s warrantability rules exist to protect both lenders and homeowners from financial risk. Buyers should research a building’s financial health, occupancy rates, and litigation history before making an offer, while sellers should be prepared to address any potential warrantability concerns upfront. If a condo fails warrantability tests, alternative financing options may still be available, but they often come with higher down payments and stricter lending terms.

What Can You Do?

If you’re considering a condo purchase, always request the HOA’s financials, check owner-occupancy rates, and ask about pending litigation before committing to a property. These factors will determine whether traditional financing is possible—or if you need alternative lending options.

The Rising Challenge of HOA Financial Health

A condominium’s financial health is just as important as a buyer’s personal credit and income when securing a mortgage. Lenders want to ensure that the homeowners association (HOA) is well-managed and financially stable, as a poorly run building can quickly become a financial liability for owners. If the HOA struggles to cover maintenance costs, faces high delinquency rates, or is involved in costly litigation, lenders may refuse to finance units in the building altogether.

Here are the biggest financial red flags that can derail condo financing:

Underfunded Reserve Accounts: A Major Red Flag for Lenders

HOAs are responsible for maintaining common areas, building exteriors, and shared amenities. To cover these expenses, they collect monthly dues from owners and set aside a portion of their budget into a reserve fund for major repairs and future maintenance.

Requirement: Lenders typically require at least 10% of the HOA’s annual budget to be allocated toward reserves.

Common Issue: Many HOAs fail to save enough, leaving them vulnerable to unexpected costs. Instead of gradually building reserves, they keep dues artificially low, which may seem attractive to buyers but signals poor financial planning to lenders.

Lender Insight: “A condo building with low reserves is a huge red flag. It’s not just about whether they can fix the roof next year—it’s about long-term financial stability. Lenders know that if reserves are too low, special assessments will follow, and that’s a risk we won’t take.”

High Delinquency Rates: A Sign of Financial Instability

Lenders pay close attention to how many owners in a building are behind on their HOA dues, as high delinquency rates suggest the building may be struggling financially. If too many residents default on their payments, the HOA may not have enough cash flow to cover maintenance, insurance, or loan obligations, putting the entire building at risk.

Requirement: No more than 15% of unit owners can be delinquent on HOA dues.

Common Issue: In buildings where a significant number of owners are behind on payments, lenders see higher risk for financial instability and future foreclosures.

Lender Insight: “If more than 15% of owners aren’t paying their HOA dues, that’s a major problem. It signals that the building could run into financial trouble, forcing the HOA to raise fees or issue special assessments—both of which can lead to even more delinquencies.”

Pending Litigation: A Deal-Killer for Many Lenders

If a condo building is involved in lawsuits, especially those related to construction defects or financial mismanagement, lenders become wary. While minor disputes between owners and the HOA may not be deal-breakers, lawsuits that threaten the financial stability of the association can make a building ineligible for financing.

Requirement: No major pending litigation related to construction defects, financial disputes, or HOA mismanagement.

Common Issue: Some HOAs file lawsuits against developers for structural defects like water intrusion, foundation cracks, or unsafe balconies. If the lawsuit involves millions of dollars in potential damages, lenders may immediately reject financing requests for the entire building.

Lender Insight: “Litigation is one of the biggest hidden risks in condo financing. Some buyers don’t even know their building is involved in a lawsuit until the lender flags it and pulls financing. If it’s a big case—especially involving major structural issues—it’s usually a deal-breaker.”

Alternative Financing for Non-Warrantable Condos

When a condo fails Fannie Mae or Freddie Mac’s warrantability requirements, buyers are left with fewer financing options. However, that doesn’t mean the deal is dead—several alternative lending options exist for non-warrantable condos. These loans typically come with higher interest rates, larger down payment requirements, and more stringent borrower qualifications, but they can still provide a pathway to purchasing in a non-traditional or highly desirable condo building.

Here’s what buyers need to know about the most common alternative financing options:

Portfolio Loans: More Flexibility, But at a Cost

Portfolio loans are issued by banks and held in-house instead of being sold to Fannie Mae or Freddie Mac. Because the lender retains these loans on their own books, they have more flexibility in approving financing for non-warrantable condos that don’t meet conventional guidelines.

Key Features:

• • More lenient lending criteria than conventional loans.
  • Often available through credit unions, regional banks, or private lenders.
  • Can finance condos with higher investor ownership, lower reserves, or pending litigation.

Common Drawbacks:

• • Higher interest rates than conventional loans due to increased risk.
  • Larger down payment requirements (often 20-25% minimum).
  • Some portfolio lenders require higher credit scores and lower DTI ratios to offset the condo’s risk factors.

Lender Insight: “Portfolio loans are often the best option for non-warrantable condos, but they come at a price. We’re willing to take on risk that Fannie or Freddie won’t, but we need to protect ourselves with stricter terms and higher down payments.”

Non-Warrantable Condo Loans: A Riskier But Viable Option

Non-warrantable condo loans are specifically designed for properties that fail conventional lending standards, whether due to litigation, commercial space percentages, or low reserves. These loans are typically offered by private lenders and specialized mortgage companies that focus on high-risk properties.

Key Features:

• • Available for condos that don’t qualify for traditional financing.
  • Can be used for mixed-use buildings, short-term rental-friendly condos, and investor-heavy developments.
  • Often structured as adjustable-rate mortgages (ARMs) to compensate for risk.

Common Drawbacks:

• • Require higher down payments (typically 20-30%).
  • Interest rates are significantly higher than conventional loans.
  • Stricter borrower qualifications (strong credit, high income, and solid reserves).

Lender Insight: “If a condo is non-warrantable, we price the loan accordingly. Buyers should expect to put down 25-30% and pay higher interest rates, especially if the building has litigation or financial issues.”

Hard Money Loans: A Short-Term Bridge Solution

For buyers who can’t secure traditional financing immediately, hard money loans can serve as a temporary solution. These are short-term, high-interest loans backed by private investors rather than banks. They are often used by investors, cash-heavy buyers, or those looking to refinance after resolving a building’s warrantability issue.

Key Features:

• • Fast approval and less emphasis on borrower creditworthiness.
  • Can finance condos in severe financial distress.
  • Works as a temporary bridge loan before securing conventional financing.

Common Drawbacks:

• • Very high interest rates (sometimes 8-12%+).
  • Short loan terms (typically 6 months to 3 years).
  • Requires a clear exit strategy, such as refinancing once the condo becomes warrantable.

Lender Insight: “Hard money loans are a last resort, but they work when buyers need to close fast or when a building is temporarily ineligible for traditional financing. Just know that they’re expensive, and you need a solid plan to refinance later.”

Real-World Examples of Condo Deals That Fell Through Due to Warrantability Issues

1. Owner-Occupancy Rate Issue: A First-Time Buyer’s Financing Nightmare

Scenario: A first-time buyer was pre-approved for a conventional loan and found a great condo in a trendy urban area. The building had a 40% owner-occupancy rate, meaning 60% of units were rented out to tenants.

What Happened? The buyer’s lender required at least 50% owner-occupancy, so the loan was immediately denied.

The Fallout: The buyer had to either find a different lender offering a non-warrantable loan (with a higher down payment and interest rate) or walk away from the deal. Since they didn’t have enough funds for the larger down payment required, they lost the condo.

Key Takeaway: Buyers should check the owner-occupancy rate upfront before falling in love with a unit. Sellers should be aware that high investor ownership can shrink the buyer pool, leading to fewer offers.

2. HOA Reserve Fund Failure: A Luxury Condo Buyer Gets Rejected

Scenario: A buyer looking at a high-end condo in a sought-after building had excellent credit and a 25% down payment. However, the lender required the HOA to allocate at least 10% of its annual budget to reserves. When reviewing the HOA’s financials, they discovered that only 4% was being set aside for reserves, as the HOA had opted to keep monthly dues low.

What Happened? The lender flagged the building as financially unstable and refused to approve the loan.

The Fallout: The buyer could only proceed if they paid in cash or found a lender willing to overlook the reserve fund issue—but the few available options had higher interest rates and stricter terms. The buyer ultimately walked away from the deal.

Key Takeaway: Luxury condos aren’t exempt from lending restrictions—even in high-end buildings, poor financial management by the HOA can make financing impossible.

3. Pending Litigation: A Surprise Lawsuit Kills the Deal

Scenario: A couple looking to buy a waterfront condo was ready to close on their loan when the lender pulled a last-minute report showing the HOA was involved in a lawsuit against the developer for construction defects.

What Happened? Because the lawsuit involved major structural concerns, the lender immediately withdrew financing approval.

The Fallout: The couple had to back out of the purchase, and the seller had difficulty finding another buyer willing to pay cash. The condo ended up sitting on the market for months, with multiple buyers backing out due to the financing issue.

Key Takeaway: Buyers should ask about pending litigation before making an offer. Sellers in buildings with lawsuits should be upfront about the situation and work with cash buyers or specialized lenders.

Tips for Buyers & Sellers Navigating Condo Lending

✅ For Buyers:

✔ Check the condo’s warrantability early – Verify if the building meets Fannie Mae/Freddie Mac guidelines.

✔ Review HOA financials and reserve funds – Ensure the building has at least 10% of its budget allocated to reserves.

✔ Ask about owner-occupancy rates – Buildings with less than 50% owner-occupancy may require alternative financing.

✔ Look into FHA/VA approval (if applicable) – Confirm if the condo is on the FHA/VA approved list before proceeding.

✔ Be aware of pending litigation – Legal disputes related to construction defects or financial instability can block financing.

✔ Understand alternative financing options – If the condo is non-warrantable, be prepared for portfolio loans, higher down payments, or private lenders.

✔ Work with an experienced real estate agent & lender – Professionals familiar with condo financing will help navigate the process smoothly.

✅ For Sellers:

✔ Ensure the condo’s financial health is strong – A well-funded HOA with low delinquencies makes financing easier for buyers.

✔ Have HOA documents ready – Buyers (and lenders) will want to see financial statements, reserve reports, and budgets upfront.

✔ Disclose pending litigation early – If your building has lawsuits, work with your agent to find lenders who will still approve financing.

✔ Market the unit’s financing eligibility – If your condo is warrantable, highlight Fannie Mae/Freddie Mac approval in your listing.

✔ Consider alternative financing solutions – If the condo is non-warrantable, work with lenders offering portfolio or private loans to attract buyers.

Knowledge Is Power in Condo Lending

Financing a condo is more complex than financing a single-family home, but understanding the challenges ahead of time can prevent delays, denials, and unexpected hurdles. Too often, buyers don’t realize the hidden hurdles in condo financing until they’re already under contract—leading to costly delays or even losing out on a deal altogether. Sellers, too, may struggle to find buyers if their building doesn’t meet lending standards. Knowing these risks upfront gives you the power to plan ahead and avoid frustration.

If you’re planning to buy or sell a condo, working with a lender and real estate agent who understands these challenges can save you time and money. That’s why I always get involved in the lending process early, ensuring buyers work with lenders who have a proven track record of successfully closing condo deals. At my initial buyer consultation, we discuss financing options, potential roadblocks, and which lenders are best suited for the condo market. I stay in close contact with lenders throughout the process to anticipate any challenges before they become problems, helping my clients avoid financing surprises and keeping transactions on track.

Don’t wait until you’re deep in the buying or selling process to uncover financing challenges. Speak with a lender, review HOA financials, and prepare early to ensure a smooth transaction. A proactive approach will save you time, money, and unnecessary headaches.

The key to condo financing success is preparation. By understanding these challenges and working with experts who know how to navigate them, you can move forward with confidence—avoiding surprises and securing the best financing options available.