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Buying a Condo in 2022: Here’s What You Should Know

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Buying a condo can be more complicated than buying a home, because you’re buying a piece of a community that has a unique set of rules and fees. The mortgage process for buying a condo can get complicated as well — your lender will consider both your finances and the finances of the condominium community.

What is a condo?

A condominium, condo for short, is a privately owned unit within a larger building of other units. Condos fall under a condominium association, which is legally responsible for maintaining, repairing, replacing and managing the common areas. The association also has the power to adopt and enforce guidelines for the members’ use of those common areas and will require residents to pay monthly or yearly dues.

Condo vs. apartment

The main difference between condos and apartments is the ownership type. Apartment buildings are often owned by a single entity, like MAA, a real estate investment trust (REIT) that owns multiple apartment buildings in several regions across the United States. Meanwhile, a condo is a single unit of a larger building typically owned by an individual. Owning a condo also builds equity while renting an apartment doesn’t. Otherwise, condo and apartment complexes both offer amenities and are responsible for exterior property maintenance.

Condo vs. house

Unlike owning a condo, owning a house typically allows you to do any remodeling you see fit. Condominium associations can limit the type of remodeling you can do and can enforce pet and rental restrictions. A condo also has less privacy than a house because you share the building with other units. Condo prices tend to be lower than home prices, however — according to the National Association of Realtors (NAR), the average sales price of a house during the third quarter of 2021 was $367,000, while that of a condo was $303,000.

Condos as vacation homes

A condo can be a vacation home and may offer amenities such as a swimming pool or tennis courts that can make it a convenient property choice. However, being under the condominium association means that you may have specific rules that restrict you from using the condo as a vacation rental.

Pros and cons of owning a condo

ProsCons
No exterior property maintenance Restrictions on remodeling and lifestyle choices
Apartment-style amenities while building equity Higher monthly costs and mortgage rates
May be cheaper to buy than a house Can be harder to sell
Can gain a sense of community May have conflicts with neighbors

Compared to a house, buying a condo may have several perks, depending on your lifestyle. If the idea of mowing the lawn and landscaping makes you cringe, a condo could be a good option because those responsibilities fall under the condominium association. You can also enjoy a potentially cheaper purchase price, amenities and a sense of community.

On the downside, condos have more restrictions on remodeling and lifestyle choices like pet ownership. So if you have many pets or want the flexibility to remodel however you like, buying a house might be a better option. Condos have higher costs including: condo insurance, association dues and property taxes. Condos are also harder to sell, because the lender goes through an extra vetting process for mortgage approval. Lastly, condos can share walls and can lead to more conflicts with neighbors.

How does a condo mortgage work?

You can use the same loan programs for condos that you’d use to buy a single-family house. However, there are some key differences in how lenders look at the two types of properties during the underwriting process.

In addition to vetting your finances, mortgage lenders also evaluate the condo association’s financial health. The lenders will determine whether the condo is warrantable by considering the following:

  • Number of units purchased
  • Number of units owned by investors (non-owner-occupied)
  • Amenities
  • Lawsuits that involve the condo association
  • Number of unit owners delinquent on dues
  • Upcoming special assessments

Buyers will have a harder time getting financing in a condo building with more investors involved, because traditional mortgage programs limit the percentage of units that can be non-owner-occupied. To navigate it all, you’ll likely want to find a lender with experience in offering condo mortgages.

Types of condo mortgages

There are several condo mortgage options available.

Conventional loans: These loans offer financing for condominiums with only 3% down, a minimum 620 credit score and cancelable mortgage insurance, so you don’t have to put 20% down when buying a condo. However, they use guidelines set by government-sponsored entities Fannie Mae and Freddie Mac, which mean that your condo has to be warrantable.

FHA loans: You’ll need at least a 580 credit score to buy a condo and make the program’s minimum 3.5% down payment. 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 loan. For military borrowers, this loan program has a 0% down payment, no mortgage insurance and no loan limits, unlike FHA and conventional loans. The VA has its own approved condominium list as well.

USDA loans: The USDA offers a 0% down payment mortgage to low income borrowers in rural areas to purchase a condo. There’s no minimum credit score requirement, but you need to meet the USDA income limits and demonstrate that you can handle the monthly mortgage payments. You can check the USDA’s property eligibility tool to find a property.

What to know about condo mortgage rates

Mortgages for a condo tend to have higher interest rates than loans for single-family homes — that’s because lenders view them as a riskier bet. Both you and the condo association need to be in sound financial health.

In addition to mortgage rates, your insurance and home appraisal can cost more, too. There is a special condominium appraisal that costs more because of the additional data an appraiser has to provide about the condominium association.

Tips for buying a condo

While buying a condo can be complicated, you can take several steps to make the process as smooth as possible.

Hire real estate professionals experienced in condo searching

Since buying a condo can be a complicated transaction, you should consider hiring a real estate agent and real estate attorney experienced with the condo searching and buying process. They can guide you through the condo association documents, including the association by-laws, recent regulations and budget, to help uncover any issues that may negatively impact your lifestyle.

Research the association management company

In addition to working with a knowledgeable real estate professional, you should do your own digging into the association management company. Find out if the condo association has been involved in any lawsuits or experienced frequent delinquencies. Also, meet the association president, board members and current residents if you can.

Ask about current and upcoming special assessments

A special assessment is money the condo association needs that is above the current budget. By asking about current and upcoming special assessments, you can understand what additional costs you need to consider before buying a condo.

Evaluate the amenities

While amenities like a clubhouse and swimming pool are nice, you should make sure they are amenities worth the price tag. Comparing amenities might help you narrow down your search. Also, mortgage lenders will want to know what amenities the condo community will have when making their evaluation.

Understand the condo association rules about rentals 

If you’re hoping to make passive income with vacation rentals, like Airbnb, you should check with the condo association first. Some associations may have rules about whether you can lease your condo.

Know the differences between a ‘warrantable’ vs. ‘non-warrantable’ condo

A warrantable condo is one that is eligible for a conventional loan, by virtue of following rules set out by Fannie Mae and Freddie Mac, which ensure they purchase condos in financially sound communities. Meanwhile, a non-warrantable condo doesn’t follow Fannie and Freddie’s rules, which means you may have a slimmer chance of being approved for a mortgage.

Things You Should Know

A non-warrantable condominium tends to have 20% or more units owned by one entity, not enough insurance coverage and higher delinquency rates on homeowners associations. As a result, financing a non-warrantable condo is more expensive, requires higher down payments and, in some cases, may not even be an option with some lenders.

To find out if it’s warrantable, check to see if the condo you’re considering shows up on approved lists, such as the one published by the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA).

Understand the full costs of owning a condo

To know if buying a condo is worth it, you should evaluate all of the costs. Not only do you need to consider the principal and interest portion of your mortgage payments, but you also have condo insurance, association dues, property taxes and mortgage insurance (if applicable).

The following example represents a $250,000 condo with a 4% interest rate and 10% down payment. Comparing these costs to that of buying a house might give you a clearer picture of whether buying a condo is worth it.

Potential monthly condo ownership costs
Principal and interest $1,074
Mortgage insurance $117
Condo insurance $73
Association dues $200
Property taxes $260
Total $1,724

Buying a condo FAQs

Are condos a good investment?

It depends. Consider the full costs of a condo compared to buying a single-family home, and also understand your condo association’s rules about leasing your condo for short- or long-term rentals.

Are condos good for first-time homebuyers?

Potentially. Condos are cheaper than houses, so they might be more affordable to first-time homebuyers. However, condos have higher monthly costs and mortgage rates, plus more restrictions.

Do condos appreciate in value?

Yes, condos appreciate in value, but at a lower rate compared to houses.

What is a good credit score to buy a condo?

A credit of at least 580 — and a 3.5% down payment — may qualify you for an FHA-insured condo mortgage.

Where do I find condo complexes near me?

The best place to start condo searching is through the FHA’s approved list of condominiums. Also, check with a local real estate agent experienced in condos.

How much money should you have before buying a condo?

It depends on the total monthly costs and the type of condo mortgage you choose. If you qualify for a VA loan for example, you likely wouldn’t need a down payment.

What should you avoid when buying a condo?

Avoid not doing enough research on the condo association before buying a condo. It’s important to meet with the association president and board of directors, if possible. Also, don’t go in alone; consult an experienced real estate professional.

 

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