Mortgages: Financing Condotels through Non-QM Lending
Financing condotels can be difficult because not many lenders will close on a condotel unit. Whether you are looking for a luxury condotel unit as a vacation spot, primary residence, or as a real estate investor, financing is made available through non-qualified mortgage lending.
What is a Condotel Unit
A condotel unit is a condominium unit that operates like a hotel. They are typically individually owned and depending on the association they can be:
- Turned over to the hotel’s rental program to be managed.
- Some allow short term and long-term rentals.
- Rented through Airbnb or other vacation rental listings.
- Used primarily as a vacation spot for the owner.
- Or even as a primary residence.
It is important to go over the rules and regulations for each condotel unit before purchasing – some are stricter than others. The units are more often bought as investment properties and second homes.
It is very common for the unit to include amenities and a full-service staff that makes them attractive to buyers and renters, but the difficulty can be financing condotels.
Condotel Financing Mortgage Guidelines and Requirements
The reason for most lenders not financing condotels is the fact that they can be risker to lenders because they secure the loan with the condotel unit. Condos have homeowner’s associations that come with more risk than a unit that does not require a homeowner’s association. In most cases, additional documentation must be reviewed by the collateral department and meet investor guidelines, which include:
- Condominium project questionnaire.
- An individual HO6 insurance policy that covers specific requirements such as walls in coverage, liability, loss of use, and more.
- Master policy – coverage for several locations, which insures walls out coverage, liability, flood insurance, operations, and more.
- Annual budgets for the association.
- And other documents depending what is filled out on the condominium project questionnaire.
Non-qualified lenders take a more common-sense approach to underwriting, and all have different condotel mortgage guidelines and requirements. For example, financing condotels for an investment property does not require income. The debt-service coverage ratio can play a factor when it comes to terms and reserves for an investment condotel unit.
Primary residences and second homes require income to prove the ability to repay the loan – your debt-to-income ratio will be taken into consideration for qualifying purposes.
Loan-to-value on Condotel financing
Lenders are always changing their guideline to layer their risk depending on their portfolio. As of February 2nd, 2022, the down payment starts at 20% – every situation is unique, and the down payment depends on:
- Location.
- If it is a primary residence, second home, or investment property.
- If you can qualify with income or no income option for investment properties.
- Credit score.
- If you own a primary residence, have 12-month payment history renting, or live rent free.
- Loan purpose.
- Appraised value and loan amount.
- Other factors.
Some scenarios require manual interest rate pricing and a Loan Originator can go over your case scenario for financing condotels.