Condominiums can be the best housing option for homebuyers with a smaller budget and would want less burden for maintenance, repairs, security, and landscaping.
Whether you want to buy a condo as your first home or as an investment, owning a condo is a long-term commitment especially when you’re taking a loan to finance it.
Normally, a lender will let you choose between a 15-year and 30-year repayment term.
A long term would be the better choice for buyers who want a lower monthly payment while the short term saves the buyer a lot of interest in the long (or short) run.
Take a look at the different types of 30-year loans and the condo’s qualifications before you commit to a loan package.
If you’ve got your heart set on a newly-built condo, you should be aware of a few steps that you should comply with to get a mortgage so you can buy it.
What Is a Condo?
A condominium is a property that you can purchase outright and it’s a hybrid between an apartment and a house. Condominiums have many similar features that you can get in apartment living.
For example, condominium units are adjacent to each other so owners often share a wall or two with their neighbors and live just literally several steps away.
The main difference between a condominium and an apartment is that you can sell a condominium unit independently of the other units so investors regard it as real estate.
Whether the building design resembles an apartment building or as detached units that look like single-family homes, it’s the community association that jointly owns and maintains the common areas such as yards, building exteriors, hallways and inside streets.
Is Condo More Attractive Than Typical Home?
Families may favor a condo over the typical single-family residence for different reasons.
To know some of their differences, when it comes to ownership, private residences have individual private owners. Condominiums, on the other hand, have different joint owners and they are often the condominium residents or unit owners.
In the more expensive markets like the downtown areas, condos are highly popular because they are cheaper than single-family residences.
For this reason, many homebuyers get the opportunity to enter and live in an area where they might not be able to afford a house.
It’s also a feasible option than renting an apartment especially as a condo owner, you can build equity and even use your mortgage interest as tax deductions for your income tax.
Condos appeal to first-time homebuyers because of their affordability.
For the retired, they are also popular since many condominium projects often provide services and facilities that cater to their special needs.
Since condos often have common areas that all residents in the building own, there is a governing board that oversees the operations of the condominium community.
These associations primarily manage the place and lay down (and implement) the rules and guidelines for the residents.
Here are the top advantages and a few disadvantages to help you in your decision-making process.
It’s much cheaper than buying a comparable single-family house
Condo costs will depend on the size of the home, the property values in the area and the cost of living in that particular city.
You would normally need less money to purchase a condo but industry experts reveal that historical data show that single-family detached homes appreciate in value faster than condominiums.
If you don’t like yard work, gardening, tinkering in your garage-workshop or you’re all thumbs when it comes to maintenance, the condo world is your habitat where you don’t normally have opportunities for these things.
Most condominium management hires professionals to do the landscaping, repaint the halls, maintain the exterior, etc.
If something on the interior breaks, they will send someone over to fix it for you.
Many condo complexes hire full-time security guards and install surveillance cameras or other security gadgets.
For example, access to the parking garage will require a key card that they will issue only to legitimate residents.
Sometimes, even the front door and elevators will only work if you have an access card or key.
Although many condos are in urban areas, the extra security measures give the residents an extra peace of mind that you won’t normally have in an independent single-family home.
It’s possible that you can afford to buy a single-family home but unlikely that you’ll be able to install your own backyard swimming pool and a personal gym.
Most condominium communities have various amenities for the residents such as pools, tennis courts, jogging paths, mini-parks and clubhouses that residents can use without worrying about cleaning them or fixing them.
Having a gym alone is worth a lot because you can use it anytime without having to pay the usual minimum membership fee of $50/month.
The condo price isn’t all you will have to worry about. The mortgage payments and appreciation rate aren’t all you have to consider.
You should include the association dues.
Selling a condo is much harder than selling a home because, well…what makes your unit different from the other identical units in the building?
If you have the best view or in the quietest area of the building, it may add some selling points. It’s easy to know how much to ask for your unit because you can always compare your price with the other units in the community.
You Can’t Choose Your Neighbors
Even if you’re the extrovert in the family, it can be tough sometimes to get along well with neighbors.
In a condo community setting, the community board or association is the governing body that sets the rules.
You would probably have rules about pets, visitors, use of shared facilities, etc.
If homeownership to you means being able to do what you want with your space (like placing plant boxes beside your front door), a condominium may not be the best home for you.
If you used to live in a small apartment, moving into a condo may not give you ‘space’ problems.
But if you’re moving in from a four-bedroom house with a two-car garage and a shed in the back, the condo space may not be enough even for just your furniture.
Some condo communities would provide communal bike storage and maybe even individual storage shed on the roof – but it won’t compare to the same usable space that you used to enjoy in your old house.
To keep the common areas in their tip-top shape and looks, the condominium association must pay professionals to maintain them.
Where will they get the money to pay for this?
From the residents, of course, who will have to shell out a few hundred dollars a month in association dues.
Getting a Mortgage For Buying a Condo
Although condo unit prices are less steep than typical single-family homes, mortgages for condos are technically more expensive.
The reason is that the value of a condo unit has an attachment to several risk factors and most of them are beyond the borrower’s control.
To mitigate these risks, Fannie Mae and Freddie Mac have set higher eligibility standards on conventional condo mortgages.
You will notice that both the down payment and interest rate on a condo mortgage tend to be several rungs hugher than for a regular house at a comparable price. Take note:
- You’ll pay a down payment of 25% (It’s just usually 20% if you buy a single-family house)
- The interest rates are 0.5%-0.75% higher than interest rates for a single-family house loan
Plus, other considerations may disqualify an applicant from getting loan approval.
Lenders will check the association’s reserves and budget if they are financially viable by requiring a condo questionnaire or by a review of the official association documents.
Other factors that may harm the borrower’s financing application are:
- Pending litigation versus the association
- A delinquency rate of more than 15% on condo dues
- Condo units are renting out 50% or more of the units
- More than 20% of the units belong to just one person or entity
On top of this, the condo must pass an appraisal to establish that the property’s value and conditions meet the requirements for financing.
Plan Your Budget
Condo fees are one of the most important considerations when buying a condo.
You might think that you could save a lot of money by buying a condominium instead of a single-family home but don’t forget to factor in the higher associated costs that you must pay for each individual unit that your acquire.
The monthly fees vary per association but it’s not unheard of for some associations to charge other quarterly or yearly fees as well.
The fees are mandatory so your lender calculates the fees into your out-of-pocket estimates and into your debt-to-income ratio.
So, when looking for a condo to buy, check the homeowner association (HOA) obligations carefully and understand what you will be paying for.
Then ask for the other fees that you might still need to pay separately such as parking, pool passes, use of the gym and function rooms, etc.
You should consider all these expenses into your monthly budget computation and you should inform your lender about each one of them so you can accurately calculate your monthly expense allocation.
And remember that even if your lender usually escrows your home insurance payment with your monthly mortgage payment, they won’t do that with your HOA payments.