Did you know it’s possible to buy a condo unit using a VA home loan? Buying a condo is a bit different than purchasing other types of eligible properties using a VA mortgage, but it’s not as complex or as involved as applying for a construction loan.
To begin, it’s important to define terms–what does the Department of Veterans Affairs define as a condominium unit?
The Definition Of A Condominium According To The VA
Condos are considered “common interest communities” which means that unlike when a borrower purchases a typical suburban home where you are solely responsible for your own yard maintenance, snow removal (where applicable), roof issues, and other concerns, the condo owner works together with other members of the condominium association to plan and share responsibilities for common areas.
Condos are typically owned by an association of condo unit owners–these associations are casually referred to as homeowners associations (HOA) even though the condo unit is not a standalone house.
The basic concept is the same as a homeowner’s association in a suburban neighborhood; a collective of owners agree on certain rules and bylaws that govern upkeep of yards and other public-facing areas.
In the case of a condo owner’s association, the covenants may include aesthetics for publicly visible paint schemes and other issues as well as agreements for maintenance and upkeep.
VA Loan Rules About Condo Projects
The Department of Veterans Affairs addresses this in the rules found in the VA Lender’s Handbook (VA Pamphlet 26-7) that govern condo transactions. According to Chapter 16, condos as a common interest community are defined as a structure or structures on “common land, often including recreational amenities.
That common property is typically owned by an association of the homeowners (HOA),” which requires “lien-supported assessments” for each owner which is a cost-sharing approach to the the expenses of the HOA.
Both condominiums and planned unit developments (PUDs) are defined by the VA as being common interest communities.
VA Approval Is Required
One thing that makes buying a condo unit with a VA mortgage different than purchasing a suburban house, townhome, or mixed-use property?
The condo project must be approved by the Department of Veterans Affairs, which maintains a national list of VA-approved condo projects on its official site, or your lender can tell you whether a specific condo project near you is approved or not.
If your condo project is not on the approved list, you can discuss this issue with the lender to see what it may take to have the project added to the approved list, assuming the condo project is not ineligible in some way.
Ineligible Condo Projects
What makes a condo project ineligible for a VA mortgage? There are a variety of issues but one of the most important ones is whether or not the condo owner’s association includes something known as the Right of First Refusal in its bylaws.
The right of first refusal is a clause that basically gives the HOA approval authority over who you can sell your condo unit to and when. This is not acceptable to the Department of Veterans Affairs–the borrower using a VA loan must not be restricted from freely disposing or transferring the condo unit as they see fit at any time.
That means that if an HOA has such a clause in its bylaws, that clause must be rendered as not applicable to the VA borrower or otherwise be mitigated and even that is no guarantee that the condo project will be approved for a VA mortgage.
Condos that are already on the VA-approved list don’t require the additional legwork needed in this regard.
Other Requirements For VA Approval
The VA official site states clearly that condos may be approved by the VA when they meet “both title and lien-related VA regulatory requirements.” Your participating lender is responsible for making sure the condo project you have selected does indeed meet these standards. What kind of standards?
Acceptable title requirements including a rule that “the estate must not be less than fee simple, except under certain circumstances” and that the title must not be subject to “unreasonable restrictions” for use, occupancy, and transfer.
Every VA loan must be a “first lien” on the property, including loans for condo units. Any mandatory HOA assessment associated with the condo purchase must be a subordinate loan to the VA mortgage.
Things You Should Know About Buying A Condo With A VA Mortgage
At the most basic level, buying a condo unit is a lot like buying a typical suburban home–you’ll find the condo project you want to buy a unit in, contact a lender, etc.
You and the lender will determine that the condo unit is on the VA approved list or needs to be added to it. Approval of a condo project is not automatic, but don’t assume the unit you want is out of reach simply because it is not yet on the approved list.
VA condo loans have the same terms as other VA mortgages including the option to make no down payment, a lack of VA-required mortgage insurance premiums, and generally more forgiving credit qualification guidelines.
Remember that a participating VA lender is free to require a specific FICO score range for condo unit purchases as long as those FICO requirements are applied fairly to all applicants. If the FICO score requirements for certain types of VA loans is higher, this may be due to a variety of factors but remember that these are established by the lender, not the Department of Veterans Affairs.
Owning a condo unit means some additional commitments that may not necessarily be present with other VA mortgages.
One such commitment? Any applicable HOA fees or assessments required in your legally binding contract. You must carefully read over all HOA documents prior to signing and committing to the mortgage loan. You may be liable for certain fees and expenses as a condo owner in that association and you’ll need to know what any specific consequences may be for being late on HOA fees, property taxes, or other costs.
You may learn in the fine print that condo units are subject to special assessments if they do not meet certain standards such as carrying sufficient insurance. Know the penalties and consequences of non-compliance or late compliance with HOA rules BEFORE you need to.
The HOA issues discussed here are not consistent from state-to-state. Some states have laws restricting an HOA in how it may apply special assessments. Others do not. You will need to know what laws may apply to you and fortunately an experienced VA lender can help you understand the rules and concerns that may be applicable in your state.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
