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What to Know About Buying a Condo in 2021

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Buying a condo means you’re not just buying a home. You’re also buying a piece of a community, one that comes with its own rules — and its own fees. A condominium, or condo for short, is a building of individual units for sale instead of rent, and all owners pay for and share common areas.

Getting approved for a mortgage on a condo may involve jumping through some extra hoops, as well. It won’t just be your credit under scrutiny; your lender will also examine the finances of the condominium community.

What is a condo?

A condo is a building with individual units for sale instead of for rent. When you buy a condo, you buy one individual home within a building or group of buildings, plus an ownership share of all the common areas in the condo community. Common areas might include a lobby, laundry room, gym or rooftop deck.

In larger cities, some condos may feel more like hotels, with 24-hour security, indoor pools and sometimes even small grocery stores.

A condo building is usually governed by a homeowners association, called a condo or unit owners association. The members are typically elected by other condo owners in the building and are tasked with collecting dues, maintaining common areas, enforcing rules and making other decisions for the group.

Condo association dues can range from $100 to $700 per month (or more in upscale buildings). The fees cover the maintenance of the building and all common areas, as well as the salaries of condo association employees, maintenance workers, groundskeepers and security staff.

From time to time, the condo owners association may levy a “special assessment,” or a significant fee charged to each condo owner to cover major updates or upgrades, like replacing a roof, resurfacing a pool deck or upgrading plumbing.

Differences between a ‘warrantable’ vs. ‘non-warrantable’ condo

When you’re shopping for a condo, a key thing you’ll want to look for is whether it’s a “warrantable” versus “non-warrantable” condo. While condos may look the same, they’re viewed very differently in the eyes of a mortgage lender.

A warrantable condo is one that is eligible for a conventional loan, by virtue of following rules set out by government-sponsored entities Fannie Mae and Freddie Mac. These agencies, which fuel the U.S. mortgage market, want to ensure they purchase mortgages for condos in financially sound communities.

A non-warrantable condo doesn’t follow Fannie and Freddie’s rules, which means you may face a steeper chance of being approved for a mortgage. Non-warrantable condominium financing is more expensive, requires higher down payments and, in some cases, may not even be offered by some lenders.

Here are a few of Fannie Mae’s rules for warrantable condos. All of them have to do with the condo owner’s association that governs the property.

Warrantable condo Non-warrantable condo
No more than 15% of units are past due on HOA dues Higher delinquency rates on HOA dues
At least 10% of annual budget held in reserve Lower cash reserve amounts
No required memberships for external organizations Requires membership to a golf course or country club
Many individual owners Has 20% or more units owned by one entity
Adequate insurance coverage Not enough insurance coverage

Pros and cons of buying a condo vs. a house

The condo lifestyle is a lot different than living in a single-family home, and there will continual trade-offs you may need to make on costs, responsibilities, privacy and the type of community you live in. You’ll want to keep all of these considerations in mind before deciding to buy a condo.

“Condo owners need to know that when they’re buying a condo, they’re buying their share of all the great things about the condo — the location, the amenity, the lifestyle,” said Robert Ade, a Seattle real estate broker who specializes in condo sales. “They’re also buying their share of anything bad that’s going on.”

Pros of buying a condo vs. a house

You don’t have to deal with exterior property maintenance

You’re responsible only for what’s inside the walls of your condominium — everything outside those walls is handled by your condo owners’ association and paid for with your monthly dues.

You get the amenities of an apartment complex while building equity

As a condominium owner, your payment every month helps build equity, so you can get the benefit of homeownership without giving up the conveniences of apartment-style living.

Your condo may be cheaper than a house

Condos are typically cheaper to buy than single-family houses. The median sales price for a condominium in October 2020 was $273,600, according to the National Association of Realtors. In that same month, the median sales price for a single-family home was $317,700.

You get a sense of community

If you’re an outgoing person, or simply like the hustle and bustle of having other people around, buying a condo can be a great way to build community and meet new people.

Cons of buying a condo vs. a house

You have less flexibility

Condominium associations come with rules called covenants and restrictions, which may limit some lifestyle choices. You may not be allowed to have a pet, or you could be limited to a certain breed or size, for example.

You have higher monthly costs

When you own a condominium, you must pay your monthly condo owner’s association dues, which can increase over time. You also may run into special assessments levied to maintain and upgrade your building.

Condos can be harder to resell

Some condos put restrictions on who you can sell to, and if the association doesn’t manage its budget well, potential homebuyers might be wary of buying your unit.

You may have challenges with neighbors

If you rent an apartment, you can always move when your lease is up. However, if you own a condo unit, things may be much tricker if issues crop up with neighbors.

How does a condo mortgage work?

You can use the same loan programs for condos that you would use to buy a single-family house. There are some key differences, however, in how lenders look at the two types of properties.

In addition to vetting your finances, mortgage lenders evaluate the financial health of the condo association as well. Your lender will send the condo community a questionnaire that covers things like:

  • How many units are in the community?
  • How many units have been purchased?
  • How many units are owned by investors?
  • What amenities does the condo community have?
  • Is the condo association involved in any lawsuits?
  • How many unit owners are delinquent on dues?
  • Are any special assessments coming soon?

All of these questions help determine if a condo project is warrantable and whether the buyer will run into unforeseen costs that will put the loan at risk. For example, if the association decides to allow more investors to be involved in your building, buyers may have a harder time getting financing because traditional mortgage programs have stricter limitations on the percentage of properties in a condo building that can be non-owner-occupied. This may reduce the pool of prospective buyers in the future, making it harder to sell.

“That’s the big thing that you need to look at when buying a condo,” Ade said. “You need to find out how much money they have on hand. Have they been saving up enough money to do all the repairs?”

To navigate it all, you’ll likely want to find a lender with experience in offering condo mortgages so you don’t get tripped up.

“You really want someone in a marketplace that’s known for doing condos. It is a different animal,” said Brandon Sparks, a mortgage broker and partner at an Austin, Texas-based firm. “You want someone who has the experience because frankly there are a couple of things you have in the process that can delay or derail.”

According to Sparks, avoiding delays means being able to quickly send out the condo questionnaire, lining up an appraisal with someone experienced in valuing condos, examining the condo community’s insurance and evaluating any lawsuits the community is involved in.

Types of condo mortgages

Conventional conforming loans

A conventional conforming loan follows the guidelines set by Fannie Mae and Freddie Mac. Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® loan programs offer financing for condominiums with only a 3% down payment and cancelable monthly mortgage insurance. In other words, you don’t have to put 20% down to buy a condo.

To qualify, your condo has to be warrantable. Check to see if the condo you’re considering shows up on approved lists from the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA). If it’s on their list, chances are it’s warrantable for conventional loans as well.

FHA loans

Qualifying for an FHA loan for a condominium is no different from qualifying for the purchase of a single-family residence as far as your income, credit and assets are concerned. You’ll need a credit score of at least 580 to qualify for the program’s lowest 3.5% down payment. When you’re looking for condos, use the condominium search tool offered by the U.S. Department of Housing and Urban Development (HUD) to see if the project is approved, or has been submitted for approval.

VA loans

Active-duty military members, veterans and eligible spouses can buy a condo with a VA home loan. Military borrowers can purchase a condominium in approved projects with a 0% down payment, no mortgage insurance and no loan limits, unlike FHA and conventional conforming loans. The VA also has its own approved condominium list you can use to see if a particular project is approved.

USDA loans

The USDA also offers a 0% down payment mortgage to help low-income borrowers in rural areas purchase a condo. There’s no minimum credit score required, though you must prove you’re able to handle the debt while meeting USDA income limits for your area. Make sure the property is eligible for USDA financing by checking the agency’s property eligibility tool. Keep in mind, though, that it may be harder to find a condo in rural areas.

Is buying a condo worth it?

When you’re evaluating whether a condo is affordable or a good deal, take into account more than just the location and the mortgage. Factor in the monthly condo dues, what those dues include and the likelihood of any future special assessments.

Dues can range from $100 to $700 per month and typically cover:

  • Maintenance costs for common areas
  • Insurance premiums
  • Taxes
  • Administrative or management fees
  • Reserves for future costs

The following example represents a $250,000 condo with a 4% interest rate and 10% down payment.

Potential monthly costs for a condo

Principal and interest $1,074
Mortgage insurance $117
Condo insurance $73
Association dues $200
Property taxes $260

What to know about condo mortgage rates

Mortgages for a condo tend to have higher interest rates than single-family homes do — that’s because lenders view them as a riskier bet. There’s more hanging in the balance than just your ability to repay the loan; the condo owner’s association must also be in sound financial health.

“For some people, it’s a highly desirable style of living. [For] a lender, it’s a higher risk,” Sparks said.

Other costs may be higher as well. Private mortgage insurance may be a bit higher, and the home appraisal is completed on a special condominium appraisal form that may cost more because of the additional data an appraiser has to provide about the condominium association.

Should I buy a condo?

Condos aren’t for everyone. Consider whether condo life is right for you before making the decision to buy one.

you should consider a condo if:
  • You want to live downtown. Condos can often be found in downtown areas and represent the most cost-effective way to get the big-city lifestyle. If that’s important to you, a condo might be a good choice.
  • You’re older and want to downsize. Condos also work well for older people who don’t want to deal with property maintenance and the hassles that come with it.
  • You have a crazy work schedule. If you have a job requiring a lot of travel, a condominium may be your best bet to avoid a lot of exterior upkeep.
  • You like the apartment lifestyle. If you’ve been renting and want to ease into homeownership, a condo could be a good first step.
you probably shouldn’t consider a condo if:
  • You have a big family. Families who value a big backyard and the traditional neighborhood feel might want to steer clear of condos.
  • You might need to move quickly. Since reselling a condo can be tricky, you might also avoid condos if you think you might need to move quickly.
  • You want more privacy. Your unit may be literally attached to a neighbor above, below and beside you. If you’re a more private person and don’t like small talk in the elevator or the prospect of noise from down the hall, condo ownership may not be for you.
  • You have a lot of pets. Many condo communities have rules about pet ownership and what types of pets you can have.

Questions to ask when buying a condo

Before making an offer on a condo, ask the seller or condo association the following questions:

How much are the dues?
You’ll need to factor this into your homebuying budget. Dues may be collected monthly, quarterly or annually. Keep in mind, dues may vary based on the size of the unit and the location.

When were the last special assessments levied?
A condo community with frequent special assessments is likely not budgeting properly, which could be a red flag. These costs can also add up quickly and break your budget.

Who’s responsible for what maintenance?
Pay close attention to what you get for your monthly dues and what you’ll be responsible for. You don’t want to buy a condo for the maintenance-free lifestyle and find out you’re on the hook for more than you bargained for.

Can I rent out my condo?

It depends. Some condo associations may have rules about whether you can lease your condo or use services like Airbnb.

Can I see the HOA meeting minutes?
Reviewing the minutes can help you evaluate the financial health of the condo association and see what issues residents are concerned about.

How often do these condos sell?
Frequent sales can be a good thing — or a cause for concern. High demand for your condo community can make reselling easier, but you may want to live somewhere that doesn’t have a high turnover or a lot of rental units.

 

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