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Your guide to buying a condo

Would you like to have your cake and eat it too? From Millennials to retirees, condominiums offer the best of home and apartment living in one convenient package. Condos can feature spacious floorplans, maintenance-free living and lower listing prices than traditional homes. However, there are a few key differences to keep in mind. Follow our guide to see if the condo life is right for you!

Loan features

Condos are often priced lower than surrounding single-family homes, which makes them a great option for first-time homebuyers looking to put down roots. Just like buying a home, the key ingredients to a great condo loan are a stable income and stellar credit rating.1

However, because the financial stability of a condo complex depends on multiple owners paying their bills, lenders tend to view condo loans as riskier than home loans. This may result in higher interest rates on conventional loans, even with 5-10% down. One possible workaround is a higher down payment. Some lenders require a down payment of 20-25% for the best rates on a Fannie Mae condo loan.2

FHA condo loans are a different story altogether. Like FHA home loans, they offer down payments as low as 3.5%, lower credit requirements and more flexible underwriting qualifications than their conventional counterparts. However, there is a small catch—strict requirements limit the number of FHA-approved condos available on the market. The FHA requires condos to pass an annual financial review, and failure to comply means loss of approval status.3

Homeowner association

A maintenance-free lifestyle is an awesome perk of condo living, but it isn’t free of charge! Condos are run by a homeowner association (HOA), which covers upkeep, building repairs, property maintenance and shared amenities—gym, pool, clubhouse, etc. These services and facilities are funded by community residents who pay regular dues and abide by a declaration of covenants, conditions and restrictions (CC&R). CC&R guidelines dictate everything from parking to pet policy and acceptable paint colors.4

HOA fees can range from a couple hundred to a couple thousand dollars a month depending on location, quality and breadth of services. This extra cost can help you save money in the long run—you’ll never have to hire contractors for roof repairs, siding or landscaping. Inside your unit, however, you still will have to foot the bill for furnace, water heater and appliance repairs if ever needed.*

Does your HOA require an annual fee? You may be able to incorporate it into your closing costs. Some condos also include homeowner’s insurance in their monthly HOA dues—particularly FHA-approved properties.5

Warrantable condo requirements

Fannie Mae and Freddie Mac use the term “warrantable” to describe condo properties for which they’ll purchase and securitize a mortgage.6 Lenders want to make sure properties are compliant with guidelines before approving a mortgage. Plus, warrantable condos create lower risk for the bank. Therefore, many lenders don’t fund mortgages for non-warrantable condos. Fannie Mae and Freddie Mac warrantability requirements can be based on the following:

  • The HOA or developer named in any lawsuits
  • Owner occupancy ratios
  • Subdivision of units into multi-dwelling properties
  • The HOA’s financial stability—i.e., 10% budgeted reserve funding
  • Single investors that own greater than 10% of the total number of units in the project
  • Residential usage—retail or office space limited to 25% of total building space
  • Delinquency percentage–no more than 15% of unit owners behind in HOA dues payments
  • Adequate insurance provided for the project

Warrantability requirements are a blessing in disguise. Your lender’s legwork can unearth hidden red flags and confirm that you’ve picked an upstanding condo complex to call home.

Non-warrantable condos

Got your heart set on a non-warrantable condo? You’re in luck! If a project contains non-warrantable characteristics based on any of the requirements listed above, some lenders feature a variety of non-warrantable condo financing options you can explore.  

References:

1 MyMortgageInsider.com, “Find an FHA Approved Condo Quickly and Easily”

2 MortgageLoan.com, “What’s Different About Getting a Condo Mortgage?”

3 Entp.hud.gov/idapp/html/condlook.cfm

4 Investopedia.com, “9 Things You Need to Know About Homeowners’ Associations”

5 NerdWallet.com, “Mortgage Closing Costs, Explained”

6 TheMortgageReports.com, “Warrantable & Non-Warrantable Condo Mortgage Rules Updated”

*The specific legal documents for each project will determine what items are the association’s responsibilities, and those that are the responsibility of the unit owner.


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