There are a lot of good reasons to buy a condominium. Many condominiums offer services and amenities, such as swimming pools, pickleball courts, gyms and communal clubhouses. In addition, condominiums are often less expensive than buying a single-family home, making them a good investment for first-time buyers who want to build equity.
Understanding how a condominium complex operates and how to buy into one is key to deciding if condo living is for you.
If you are asking, “How do I purchase a condo?” here’s what you need to know.
Key Takeaways:
- A condo is an apartment unit or townhouse (or other dwelling) that you can own within a larger building or complex.
- Condos are often more affordable than single-family houses, but buyers will own only the unit, not the surrounding property.
- Condos often are part of a homeowners association (HOA), and owners must pay dues or fees toward any shared amenities as well as landscaping, snow shoveling and other home-related services.
What Is A Condo?
A condominium, or condo, is usually a single unit, often an apartment or townhouse, within a planned community of similar homes. Some condominiums are in high-rise buildings, others are townhouses or even detached houses within a planned community.
Most condominium communities have a homeowners association that works with the property management team to take care of shared spaces and, if applicable, the exterior of a building housing multiple condo units.
Condo owners must pay monthly HOA fees on top of any mortgage payment. These fees pay for the upkeep of the property and any amenities and services shared by the residents. Often, there are HOA rules and regulations for a condominium complex, so it is important to understand how a particular HOA operates within its condominium community before purchasing a unit.
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. Why? Because the sale price and required down payment for buying a condo vs. a house are generally much lower, making condos more accessible. In some cases, the process of securing a condo loan can be complicated and less streamlined than buying a house.
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 – an important difference between buying a house and a condominium unit.
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.
Lender 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. There are several main requirements of purchasing a condo in a new building.
Construction Requirements
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, some investors require that the most recent phase of construction must be complete. Others are worried only about the completion of the building in which the unit is housed.
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, and lenders and loan originators want to make sure properties are safe and move-in ready.
If you want to buy an FHA-approved condo, there could be other requirements and conditions, too. Ask your lender about any new construction requirements.
Presale Activity
Because a poorly run condo association can have a detrimental effect on your property value, major mortgage lenders generally require that condo complexes be 75% or 90% full in the presale phase, although the exact figure will depend on the mortgage lender or investor. However, if you’re looking to buy before 75% of the units are sold, your lender may 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 is unable to pay their dues for any reason, the association wouldn’t miss out on a major chunk of its funding.
Budget Requirements
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.
Emergency Reserves
Many people buy a condo for the communal spaces and a maintenance-free lifestyle. These amenities 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.
Condo associations must set aside a minimum (in some cases) of 10% of their budget, for emergency reserves or savings, in case repairs are needed in communal and exterior areas, such as replacing the pool filter or fixing the air conditioning in the clubhouse.
Other Considerations Before Buying A Condo
Several other basic guidelines must be met before your lender will approve a condo loan. These include:
- Legal concerns: Any pending legal issues in which the condo association or developer is involved need to be reviewed. If there’s any litigation involving safety issues, the loan can’t be approved.
- Condo bylaws: 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).
- Insurance: 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.
- Government loans: 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
The Bottom Line About Buying A Condo
Buying a condo, whether or not it’s part of a brand-new complex, is a great way to jump into homeownership. While there are many benefits and drawbacks to purchasing one, 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. Don’t forget to ask your lender if there are any special requirements to qualify for a condominium loan.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
