Did you know that qualifying for a mortgage is more than about your personal qualifications? You could be the most attractive borrower in the world, but if the property type doesn’t pass the mortgage guidelines, you could find yourself without financing.
So what property types could put your mortgage approval at risk?
The Different Property Types
Lenders only want to give financing for certain property types. In a perfect world, every borrower would purchase a single-family property. There would be less for lenders to worry about, making it easier for them to give financing approval.
Unfortunately, that’s not the case. Not everyone can afford a single-family property in every area. Some borrowers just don’t want the responsibility of a single-family property either because of the responsibility that comes with maintenance and repairs. So what other property types are there?
- PUDs – Planned Unit Developments are as close to single-family properties as you get. In fact, many PUDs are single-family properties. They are just a community of homes grouped together in a large subdivision. Homeowners own the land and the home on the land. There is usually a homeowner’s association fee and common areas of the subdivision, such as a clubhouse or pool that the homeowners own/have access to year-round.
- Townhomes – Townhomes are attached or detached properties with similar features to a single-family property. Townhomes sit on land, but you don’t own a yard. You own just the land that the townhome is on, but this makes a difference to lenders. You will pay homeowner’s association fees, but townhomes typically hold a similar risk of default as single-family properties.
- Condominiums – If you buy a condo, you don’t own any land. This is a red flag for lenders. You own just the interior of your unit plus the portion of any common areas that you are entitled based on the ownership in the development. The type of condominium, the status of the HOA, the type of ownership throughout the building, and the timeliness of HOA dues paid by the unit owners play a role in your ability to secure financing for a condo.
- Manufactured homes – Manufactured or mobile homes run an even higher risk of default for lenders. Most importantly, if you plan to purchase a mobile home, you must purchase land to permanently affix the home to the land. If the home is movable, you won’t find financing. The mobile home must also meet single-wide and double-wide measurement requirements as well as be safe, sound, and stable to live. Most loan programs do allow mobile home financing, but finding a willing lender can be tricky.
- Modular homes – Modular homes are fabricated in a factory and then transported to the lot to put together. Just like mobile homes, modular homes must be permanently affixed to the ground in order for you to get financing from any of the typical conventional, FHA, VA, or USDA programs. The loan limits that the programs put into place for modular homes is typically less than you could borrow on a standard single-family home.
The Condition of the Property Matters Too
Putting the type of property aside, you still have to worry about the condition of the property you want to finance. You could have a single-family property and think you are good to get financing only to find out that the home isn’t in good enough condition for Fannie Mae, the FHA, VA, or USDA to approve a loan on it.
So what red flags would stop financing? Below are the most common issues:
- No year-round access to the home via standard roads
- Foundation cracks
- Roofs with leaking or less than 3 years left on it
- Wiring that doesn’t meet city or county codes
- The presence of mold or mildew
- Pest damage
- Commercial properties
- Buildings with a majority of investor ownership versus owner-occupied ownership
The bottom line is that lenders need to know that the property is safe, sound, and sanitary. In most cases, you need to be able to move into the home immediately. If it’s not immediately livable, you may have to work out an agreement with the lender, assuming they will approve it.
Lenders and loan programs put these requirements in place in order to protect your investment as well as their own. If they allow financing on a home with a leaking roof, for example, the damage could be expensive over time. This could put you in financial distress as you try to fix the problem and prevent further problems from the issue. This makes you a higher risk of default because sometimes it’s easier to just walk away from the home rather than digging yourself into a deeper financial hole.
Your mortgage approval does rely on the property type and the condition. Using the help of a licensed realtor can help you determine which properties have a better chance of clearing the mortgage approval process.