There’s a new condo project with a swimming pool, tennis courts and a communal clubhouse that’s caught your eye. Between these amenities and the idea of never having to worry about shoveling snow or raking leaves, you’re ready to sign up and move in tomorrow.
Before you go forwarding your mail to the new address, there are just a few things you should know about buying a brand-new condo.
What Is A Condo?
Let’s start with the basics: A condo is a privately owned unit within a building or community filled with many other units. While the owner has full jurisdiction over everything inside the condo unit, the complex’s common areas are shared between residents. This includes amenities such as pools, tennis courts, lawns and gyms.
While every condo building or community is different, the typical trade-off for having to share amenities with other people is that those common areas are maintained by property management. Residents pay for this perk through homeowners association fees, which usually cover the cost of keeping the property clean and updated.
What’s Different About Buying A Condo Vs. House?
It’s no secret that many people, especially first-time home buyers, choose to purchase a condo because of its relatively low price tag. The sale price and required down payment for buying a condo vs. a house is generally much lower, making condos more accessible.
However, the process of securing a condo loan can get complicated. When lenders consider whether to issue a loan for a condo unit, they also have to take the overall financial stability of the complex into consideration. Lenders review factors such as the building’s occupancy rates, the financial health of the condo association and the number of owners who are delinquent in their monthly payments. Due to these restrictions, not every condo unit will qualify for a loan.
Requirements For Buying A Brand-New Condo
If you have your eye on a brand-new condo unit, there are a few additional points to consider before signing on the dotted line. Let’s review the main requirements of purchasing a condo in a new building.
If you’re buying a brand-new condo unit, the entire complex may have to be finished before anyone can get a mortgage. If the condos you’re looking at are scheduled to be completed in phases, the most recent phase of construction must be complete.
These phases are spelled out in the project’s governing documents, which are set up by the builder.
The construction requirements are for your protection. Mortgage investors like Fannie Mae, Freddie Mac, the FHA and the VA want to be sure that the property you’re going to occupy is safe and move-in-ready, that way you don’t run into any problems down the road.
Many people buy a condo for the communal spaces and a maintenance-free lifestyle. These things are funded by dues collected by your condo association. The more occupants you have in your condo complex, the more money your condo association has to keep up with maintenance and repairs of communal property.
Because a poorly run condo association can have a detrimental effect on your property value, the major mortgage investors generally require that condo complexes be 75% or 90% full in the builder presale depending on the mortgage investor, meaning sold and occupied, before they’ll approve mortgage financing. However, if you’re looking to buy before 90% of the other units are occupied, your lender may still be able to help you.
There are also limits on how many units can be owned by one individual or entity. This way, if one of the owners were unable to pay their dues for any reason, the association wouldn’t miss out on a major chunk of its funding.
It may be necessary for your lender to review the condo association’s budget to determine the health of the condo project. This helps your lender make sure the project will remain solvent should there be a big expense.
Your lender will typically perform a budget review if you have a high loan-to-value ratio (for example, a low down payment). The budget review might also be necessary if you’re buying a condo as an investment property.
The builder or condo association should be able to help furnish the appropriate documentation for the review. Your lender will reach out to these parties on your behalf to obtain the documentation. There are several budget requirements your lender will look for, but we’ll highlight a couple of the big ones.
Condo associations must set aside 10% of their budget for emergency reserves or savings. This ensures that there will be money for repairs that affect external areas or use of communal parts of the property. Reserves can be used for services like replacing the pool filter or fixing the air-conditioning in the clubhouse.
Your lender may also take a look at where the condo association gets its income. It can’t get more than 10% of its income from public business operations. This limits the amount of income the condo association can receive from things like restaurants and spas that it makes available to the public at large. This helps make sure the association doesn’t take too big of a hit if the business fails.
Things To Consider About Buying A Brand-New Condo
There are several other basic guidelines that need to be met before your condo financing can be approved by your lender:
- Any pending legal issues the condo association or developer is involved in need to be reviewed. If there’s any litigation involving safety issues, the loan can’t be approved.
- Your lender will review the condo bylaws to make sure there aren’t any restrictions that would unreasonably prevent you from paying off your loan (for example, restrictions on sale).
- The association also has to have the appropriate level of property, liability and fidelity insurance coverage in case of certain losses. This is verified through the documentation provided by the developer or condo association.
- If you’re getting an FHA or VA loan, the condo project must be approved by the FHA or VA. These agencies maintain a list of projects that are already approved, but if your complex isn’t on the list, your lender can walk you through the steps to obtain approval before moving forward.
FAQ: Buying A Condo
Do Condos Increase In Value?
A few factors determine whether a condo will go up in value: inflation, supply and demand, location and condo fees. Having a new condo is great because it’ll likely require less maintenance, but the older it gets, the higher its maintenance costs might be. One thing to keep in mind when you’re buying a new condo is that it won’t appreciate at the same rate as a home for a single family – but it will probably go up in value over time.
Keep in mind that condos in highly trafficked areas that are close to transit, entertainment and other amenities have a better chance of attracting a higher price when it comes time to sell.
What Is The Standard Down Payment On A Condo?
A typical down payment on a condo is roughly 3% –20% of the purchase price. Down payments vary depending on the location and the type of loan a borrower obtains to pay for their unit. Be sure to check out our mortgage calculator to help determine your monthly payment and review your loan options.
The Bottom Line: Should You Consider Buying A Condo?
Buying a condo, whether it’s part of a brand-new complex or not, is a great way to jump into homeownership. While there are many benefits and drawbacks to purchasing a condo, you should make your final decision based on your personal needs and budget. If you’re ready to buy the condo of your dreams, take the next step and learn which type of mortgage is right for you.
If you’d like, you can apply online now or give us a call at (833) 230-4553.