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Condominiums, like single-family homes, have been walloped by the collapse in real estate prices, producing mouth-watering bargains for anyone looking for a first home or vacation place, or hoping to downsize for retirement.

But getting a mortgage for a condo purchase can be even more difficult than for a single-family home. Today, the vast majority of new mortgages are backed by government-sponsored enterprises like Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), and they have tightened requirements to reduce their risks.

For starters, say HSH Associates, a mortgage-data firm, you’re likely to be charged .75 percentage points more on a loan for a condo than for a single-family home, unless you make a down payment of at least 25%. That rate boost may seem small, but paying 5.25% instead of 4.5%, the average for 30-year fixed loans, would increase your monthly payment nearly 17%.

So, what’s going on here? In a word, jitters. Given the huge numbers of mortgage defaults and foreclosures, lenders are training their eyes on anything that looks risky. When you buy a condo, the lender isn’t only worried about whether you’ll pay but the other condo owners as well. If enough of them fall behind in homeowner’s association dues, the building could fall into disrepair, causing unit values to collectively collapse.

Additionally, many condos function as homeowners’ second homes or investment properties. History has shown that owners in financial trouble are more likely to walk away from those than their main homes.

Fannie and Freddie are so down on condos they will only permit mortgages on pre-approved projects, listed on Fannie’s site. HSH says there’s a big backlog in these approvals, and in Nevada, for example, Fannie’s list has only 32 approved projects, while the state has thousands, HSH says.

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To get approved, a condo project must meet some tough standards:

  • No more than 20% of the property can be occupied by businesses such as restaurants and retail space.
  • No more than 15% of the units can be more than 30 days late on association dues and no more than 10% of units can be owned by a single person or business.
  • In a new development, at least 70% of units must be pre-sold, without “excessive” seller concessions.
  • If the mortgage applicant is buying the condo as an investment, at least 51% of the project’s units must be owner-occupied.

HSH says lenders have tougher credit-score requirements for condo loans, often as high as 740 out of 850.

It can take longer to get a condo mortgage approved, HSH says, recommending that applicants therefore get long lock-in periods on the loan terms. Of course, if it will take longer to get a loan, you don’t want to set a quick closing date.

Finally, the buyer would be wise to use a real estate agent who is accustomed to dealing with the extra issues and headaches involved in condo purchases. Though a condo may sell at a fire-sale price, the new owner could be hit with huge special assessments if the condo association runs short of money.

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