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Condominiums can often be a more affordable option than single-family homes, especially when housing prices are skyrocketing or you’re looking to build a permanent home in an expensive city.
Condos generally have more amenities like a pool or gym and offer frequent exterior maintenance, which is a plus, especially if you prefer a more manual approach to homeownership. Nonetheless, there are some important things to know before choosing to buy a condo that could be the difference between buying the property of your dreams or falling into an expensive real estate nightmare.
What is a condo?
Condos can be found in many forms within multi-family residential units – in converted townhouses, apartment buildings, or small homes within a larger community development.
Condos can be a primary residence, but are also a good choice as a second home or investment property in popular vacation destinations such as Florida and Hawaii, or expensive cities such as New York, San Francisco, and Washington, DC.
They usually come with a set of written rules and different lender requirements if you are applying for a mortgage. These, along with the Homeowners Association (HOA), dictate what residents can and cannot do with certain spaces, typically outdoor accommodation. Condos and their HOAs may also offer amenities such as building management, swimming pools, gyms, and landscaping services. But all of these come with monthly HOA fees.
Condos vs single-family homes
While many people prefer a separate single-family home, especially after the Covid-19 pandemic encouraged homebuyers to move to more spacious housing in suburban areas, there is still a need for condos.
First of all, condos tend to sell for less than single-family homes, but the tradeoff is that they can often be smaller. Second, if you don’t have the time or inclination to deal with the hassle of home maintenance, especially outdoors, a condo may be the ideal low-maintenance option.
On the flip side, these monthly HOA fees can be quite high, ranging from hundreds to thousands of dollars in major metropolitan areas. This can make your overall monthly payments for living in a condo equivalent to paying for a single family home. The HOA rules can also sometimes be too restrictive, making home ownership less attractive if you are the type of person who enjoys renovating a home.
What you need to know before buying a condo
If you’ve decided that you’d rather own a condo, it’s important to know what to expect. After closure, you will have purchased a unit within a building or community development, and you are responsible for its condition within the unit.
The community building and land are legally owned by the HOA, which is made up of you and your co-owners. You therefore have a financial stake in the building in addition to the unit you bought. The HOA board itself is usually made up of condo owners, who may include you on a voluntary basis, who meet regularly to discuss property maintenance, fees, and other items. So be prepared to know that there could be more than just financial involvement in your HOA.
This means that all parties involved have a vested interest in ensuring that the building remains in good repair. Beyond that, here are four important factors to consider.
1. Mortgage interest rate
Often times, mortgage rates for condos can be higher than the interest rates on loans to buy single family homes. In fact, your income and your credit profile aren’t the only factors taken into account: the condition of the building and the finances of the HOA also come into play.
Make sure to shop around for the best deal.
Condos generally come with amenities that are not standard with a single family home. Examples are building janitorial services, elevators, gym, lounges, recreation rooms, exterior maintenance and garbage collection.
So you might not have to pay for a gym membership that you rarely use, mow the lawn on weekends, or paint the exterior of the house. If water is included, that’s one less bill you have to track.
3. Back-end costs
It is important to note that the selling price of a condo may seem lower than that of a single family home, as it does not include the monthly HOA fees, which you can find once you look in the details section. of the house for sale.
Depending on the condo and the amenities it offers, your monthly mortgage payments as well as HOA fees could weigh more on your budget than a single-family home.
Besides HOA fees, it’s important to factor in other monthly costs like home insurance.
In addition, some HOAs require a one-time capital contribution as part of your closing costs when purchasing a condo. This is usually the equivalent of two months of condo fees and goes to the building’s reserve fund. The reserve fund is used for future building maintenance, renovations and other expensive repairs like storm damage.
Location is important, both for quality of life or if you are buying the condo as an investment. Condos are often located in major metropolitan areas, so if proximity to grocery stores, restaurants, schools, or transportation is essential, then a condo is for you.
Mortgage requirements are essential
Mortgage lenders tend to charge more for financing for the purchase of a condo than for the purchase of a single-family home.
For example, as part of their assessment of your mortgage application, lenders should assess the financial condition of the HOA to make sure they have the funds to cover major expenses and that their investment in you is safe. . This means that they will have to review the building’s insurance policy and consult the HOA’s financial statements.
Other factors that will influence the lender’s review:
- Construction. If the building is new, the chances of getting a mortgage are higher if the work is completed than if it is still under construction.
- Occupation. The more units sold in the building, the higher the fees paid are to keep the HOA’s finances healthy. Therefore, many lenders require that 75-90% of the condominium units be sold before approving your loan.
Your chances of getting a mortgage also depend on the condominium and the type of mortgage you qualify for.
The Federal Housing Administration (FHA) maintains a database of approved condos that are eligible for an FHA loan. It allows you to search for FHA approved condo projects by location, name or status.
Do your due diligence
A homeowner’s association should normally have enough reserve funds, replenished by HOA fees, to cover regular maintenance as well as unscheduled repairs. However, sometimes they will require a one-time assessment if there are sudden repairs or a spike in insurance due to damage from a storm, for example.
Be sure to examine the HOA’s books before purchasing the condo to make sure you can comfortably cover monthly fees and sudden one-off appraisals.
Buying a condo makes you a co-owner of the building, which means that you are also responsible for its maintenance. A poorly managed HOA, which in turn leads to a dilapidated building, will hurt the future value of your condo.
And if you are still undecided, consult a professional.
Fannie Mae is the biggest buyer of mortgages in the secondary market, which means they have a big influence on the demands placed by lenders on mortgages. Their Condo Buyer’s Guide is an important resource that guides you on the important questions to ask your real estate agent, lender, and HOA.