Buying a Condo with a Mortgage

If you’re tired of paying out hundreds of dollars a month and having nothing to show for it except four walls, it could be time to consider buying. But what if you don’t really want to deal with shoveling walks, cutting grass, or maintaining the pansies in the flower bed? Instead of buying a single-family dwelling, a condo might be more your speed. There are pros and cons to condo living, and the path to ownership is different than if you were buying a house. But for some, it’s the ideal way to own a home without a lot of the hassle.

What Is a Condo?

A condo or condominium is a specific type of home. It is an individual- or family-owned unit in a building with other similar units. Each unit in the building is owned by a different person, but areas such as an entryway, laundry room, or backyard are considered common areas shared by everyone. A homeowners association (HOA) typically oversees the complex and sets the rules and regulations that condo owners must follow.

The HOA for a condo is more commonly called the condo board and is composed of condo owners. Condo owners pay HOA dues and in return, they get the perks of homeownership without many of the issues. For example, most condos have services that shovel and clear sidewalks in the winter and maintain the grass and flowers in the summer. These are perks a condo owner can enjoy without taking on the tasks of maintenance.

Why Is Financing Different for a Condo?

Financing for the purchase of a condo is different than for a single-family dwelling because there is more to consider. A lender is taking a greater risk with a condo mortgage, so qualifying for a mortgage is a bit trickier. Also, it’s not enough for you to qualify for a mortgage—the HOA that oversees the condo complex must qualify as well.

Lenders have various ways of determining which condos qualify and which do not, and there are qualifications that the HOA has to follow and meet in order for lenders to give the green light. If the HOA doesn’t meet these criteria, that doesn’t necessarily mean you can’t finance the condo purchase. It just means you might have to think outside the box with alternative financing options such as a portfolio lender instead of a conventional lender.

Financing Through FHA

If you are a low- to moderate-income person looking to buy and worried about how much a down payment for a condo might run, then a loan backed by the Federal Housing Administration (FHA) is a good place to start. An FHA loan is a mortgage provided from approved lenders to help people who can afford a home purchase one sooner. For those with credit scores above 579, a down payment of as little as 3.5% is needed to qualify for a mortgage. For those with scores between 500 and 579, a 10% down payment is required.

Using an FHA loan to buy a condo requires additional qualifications. For example, more than half the units must be owner-occupied, and no single investor can have more than 10% ownership of the complex. And the HOA itself must meet certain criteria to qualify for an FHA loan. The FHA requires that an HOA put a percentage of its annual revenues into a reserve fund for the long-term needs of the property. The HOA is also required to pass a financial review every 12 months. Many HOAs don’t want to be bothered with this step, and that means that there aren’t as many FHA-qualified units.

Financing Through Freddie and Fannie

Freddie Mac and Fannie Mae are loan programs for those seeking conventional condo mortgages. In other words, you have a credit score of at least 620, moderate to high income and money for a down payment. These lenders also have specific qualifications for those who want to finance a condo, including qualifications for the HOA. The rules stipulate the following:

• Fannie Mae requires that the condo be included on their approved condominium list.

• At least 51% of the units must be owner-occupied.

• There should be no pending additions or phases to the property. The property must be more than a year past its completion date.

Alternatives

If the condo (or most likely the HOA) doesn’t meet the standards for FHA or conventional mortgages, there are other options. Because portfolio mortgages don’t sell or report to federal agencies such as the FHA, Fannie Mae, or Freddie Mac, they aren’t required to abide by these agencies’ stipulations. These loans are financed by private lenders, and the loans remain part of the investors’ portfolios. But to qualify for a portfolio loan, you may need to pay a larger down payment, often between 20% and 30% of the loan amount (and sometimes more).

Common Problems and Pitfalls

If the hurdles of getting financing aren’t an issue for you, there are still things you’ll want to consider before buying a condo:

• Covenants, Conditions and Restrictions (CCRs). CCRs are the guidelines a condo board or HOA have in place to govern the condo complex. Some of these rules might be more than you want to deal with. For example, CCRs can regulate how many people can live in your home, the number and types of dogs you can have, the color of the wreath on your door and a host of other issues. If you aren’t willing to give up some freedoms in exchange for never shoveling a sidewalk, then condo living might not be the best option for you.

• Monthly Condo HOA Fees. There’s a fine line to walk when it comes to condo fees. You don’t want to pay an exorbitant amount in fees per month, but you should be leery of condo fees that seem exceptionally low too. On average, condo fees range between $100 and $500. If your fees are expected to be outside of that range, an explanation is in order. Also, just because your fee is $200 today, that doesn’t mean it won’t be $300 tomorrow. The fees adjust, and seldom do they decrease.

• Selling Can Be Difficult. Many people don’t want to be bothered with a condo board and worrying that the board’s actions jive with what lenders want to see. This could make selling your condo a challenge. You could also get pushback from the board because the incoming buyers often have to be approved by the board before the sale can be finalized.

If you’re someone who wants to own a home but doesn’t want to deal with some of the issues that ownership comes with, condo living could be the ideal solution for you. The path toward condo ownership might prove a bit of a challenge, but knowing what to expect can help you prepare for the process.