Condo Loans

What is a Condo?

Condominiums, or condos for short, are individually owned units within a larger building. This is different than renting a unit in an apartment complex, as you privately own that specific portion of the structure you reside in.

Everything else — the building’s exterior and shared areas — is owned or managed by a condominium or homeowners association (HOA). This is a group of individuals working together to manage and maintain the building your condo resides in, including the creation and enforcement of building rules.

It’s important to note these rules may limit what you can do with your home, such as the type of remodeling projects you can do and the number of pets, or even the type of pets, you can own (if any).

To put it simply, if you decide to own a condo, you will need to...

• Follow building guidelines set by the HOA.
• Handle any maintenance and repairs your unit requires yourself.
• Pay monthly or yearly fees to your HOA.

Despite all this, condos are popular amongst first-time buyers because they are often more affordable than single-family homes over time. Not to mention, they are less time-consuming or demanding with the HOA taking care of yard work and building upkeep.

What are the Pros and Cons of Owning a Condo?

Whether you see the perks as actual benefits will depend on your desired lifestyle. So let’s see if your needs and preferences as a homeowner line up with your ideal set-up...

Pros of Owning a Condo

• More affordable than single-family homes
• Inexpensive homeowners insurance
• Shared cost of select building expenses
• Less upkeep due to no landscaping or exterior maintenance
• Appliances are usually included in the sale of a condo. In some instances, any repairs are covered by building maintenance
• Good sense of community due to communal spaces and hosted condo events
• Enjoy top-of-the-line amenities like a community pool, fitness center, spas, sports courts, or courtyard
• Secure entrances and surveillance cameras offer security and safety

Cons of Owning a Condo

• Monthly HOA fees on top of property taxes. These fees vary from $100 to $1,000
• With no yard work comes no yard to enjoy (some condos have courtyards or rooftop terraces to make up for this though)
• A lack of privacy that goes with the territory of having close proximity to neighbors
• You and any guests are obligated to follow any established condo rules and restrictions
• Condos run smaller than other types of residences
• Condos can be more difficult to resell than a single-family home
• Pet lover? There may be rules regarding the size, breed, and number of pets allowed, if any

How Do Condo Loans Work?

The first thing you need to know is that the same programs offered to single-family homes are available for condominiums. However, mortgages for condo units tend to require a bigger down payment upfront and have higher interest rates due to higher qualification standards on conventional condo loans.

The reason for this is two-fold. First, a condo unit’s value can be impacted by risk factors outside of the borrower’s control. Second, lenders do not wish to finance a condo unit purchase if the condo building as a whole appears to be a risky investment. That’s why lenders will look at more than your financial health and the amount you plan to pay upfront. They will also be evaluating the condo association’s finances.

Lenders will look at everything from the buildings’ structural integrity to the way the HOA has handled its annual budget. This includes the age of the building, the number of units purchased, the number of vacancies, as well as the number of unit owners delinquent on dues, or the number of lawsuits involving the HOA. After all, unpaid fees and mortgage defaults can cause a condo project to lose value.

With this in mind, you may wish to find a lender that has proven experience offering condo loans. You may also desire to seek out newly constructed or renovated condo buildings, as the requirements for these projects are more relaxed.

Types of Condo Loans

How you intend to use your condo and the type of condo you wish to purchase will influence the type of financing you will need. Thankfully, there are several options available to suit your needs.

• Conventional Loans - This is a loan with a fixed-rate or adjustable-rate mortgage (ARM) with assigned monthly payments and term periods. This type of loan allows you to only put 3% down as long as you have a minimum credit score of 620.
• FHA loans - Federal Housing Authority (FHA) loans are federally back loan products. With this type of loan, you only need a credit score of 580 and can make a low down payment (minimum of 3.5%). However, the rules for an FHA condo are stricter than an FHA single-family home.
• VA loans - Veterans Administration (VA) loans are reserved for active-duty military members, veterans, and eligible spouses. For these borrowers, it means no down payment, no mortgage insurance, or loan limits because their application is backed by the federal government.
• USDA loans - With USDA loan, there is no minimum credit score or minimum down payment required. However, these loans are intended for families and individuals with moderate- to low-incomes looking to purchase is "rural" areas.

In Conclusion

There’s no doubt condos come with distinct advantages over a single-family home. Thankfully, condo loans are available to help people get the funding needed to buy a condo of their own.

While they may have a higher interest rate, they’re still more affordable than your average single-family home. Not to mention, you’ll enjoy more flexible living, as there is less time and money spent on home maintenance projects.