Buying Your 1st Condo? Steps to Buying a Condo

When searching for a new home, condos can be a great option for people looking for low maintenance with the benefits of ownership. They can be a perfect fit for first time home buyers, second homes, and people looking to downgrade from a larger home. For the purpose of this article, I am assuming the purchase will be used as a primary residence. There are a few things to consider when thinking about purchasing a condo:

What is the association fee?

This is important because it can really play a role in affordability. Different communities will have different monthly dues they charge to maintain the grounds. A high association fee can limit your purchasing power because it is another bill you will need to factor in. You need to know what that monthly fee entails. Does it cover water? Gas? Cable? Pool? The more it covers, the higher it probably is, but it will help alleviate your monthly utility bills. Also inquire about “special assessments”. These are issued when the association goes over budget for any number of reasons and needs to recoup for the overage, so they will tack on an additional charge that could last several months. If special assessments are frequent, this could mean poor condition and major repairs have been needed, or the budget is not handled properly….all red flags.

What percentages of units are lived in by the owners?

This is important, because a high percentage of renters can lead to less desirable neighbors, who have less of a stake in the community. It is human nature to take care of and respect something you paid your own money for. High percentage of renters could also result in new neighbors more frequently, which could certainly hinder a feeling of community if every time you turn around you see moving trucks. I will cover this in more detail later, but this percentage plays a big role in your financing options as well. High percentage of renters can severely limit your options when it comes to financing. How old is the complex and have any major repairs/upgrades been made? Many areas around the US saw a major boom in condominium communities in the 1970′s. Building codes then were not as strict as they are now, and simple things we take for granted now like pressure treated wood, asbestos, and proper waterproofing were overlooked. If the complex is older, and none of those things have been addressed, that could result in major repairs down the road. The association should be able to provide that type of information.

Why choose a condo over a single family home?
Condos provide homeowner’s with the benefit of low maintenance. Landscaping, outside repairs, snow shoveling, and such are all issues that single family homeowners have to deal with. Living in a condo, those basic chores are not the homeowner’s responsibility. This may seem trivial, but it can add many hours to already hectic days. As mentioned above, condos work well for both first time home buyers and people looking to downsize. With less square footage, the lower the time/cost it takes to maintain it. Everything from cleaning to simple handiwork is potentially decreased. Condos will also generally keep gas and electric bills down due to shared walls and ceilings. With fewer areas for AC/Heat to escape or cold air/heat to come in, it will take less energy to maintain a comfortable temperature. Condo communities usually have quite a bit of amenities that may not be available for single family owners either. Everything from club houses, pools, tennis/basketball courts, and gyms are common. This allows for plenty of activities without added membership costs or even having to leave your complex. Single family homes will most certainly have higher taxes in the same township. People could argue that it is a wash when you factor in the association fees, but again, it depends on what the association includes.

I mentioned it briefly above, but in today’s world, financing for condos can be a tough process. Many more restrictions are placed on condos by lenders for a few different reasons. The main one is that you technically don’t own any type of structure. You own the walls in, which will limit many improvements that can be made both interior and especially exterior. It also puts you at the mercy of the associations decisions. Another major concern is the double edge sword of value. Condos are the slowest to appreciate when things are moving up and quickest to depreciate when things go south. This is an added layer of risk for lenders, and why financing can be more difficult.

For starters, for a conventional mortgage, if you are not planning on putting 25% down, expect a slightly higher interest rate than what the best may be. This is due to a “condo adjustment” from Fannie Mae of.75 points. So an example would be if the rate for the day is 5% with no points, and you put down only 20%, your rate would be 5% with.75 pts (assuming no other adjustments).

FHA makes it even more difficult to obtain financing on condos. The first hurdle is making sure your community is on the FHA approved list. If not, FHA may not be an option. It is possible to get the community approved, but will add steps to the process, but not impossible. Much of FHA approval is based on the amount of units that are owner occupied (as I mentioned above) as well as the master policy carried by the association itself. Another factor is communities still in building stage. Incomplete communities can hinder approval. This is important because FHA is very common for first time homebuyers, due to the little down money need, and condos are also frequently bought as people’s first homes.

So without listing every lender condo guideline, the bottom line is that there are many more layers for a lender to consider when attempting to issue an approval for your financing than they would have with a single family home. To get more details on that process, it is always best to speak to your loan officer.

In closing, condos can be a wonderful choice when looking for a home if you know what to expect and what to look for. Asking some of the simple questions above can help you avoid communities that could be more of a headache than they are worth. Finding the right one for will provide you with a low maintenance home with all the benefits of ownership (tax deductions, interior improvements, appreciation) without many of the downsides single family homeowners must face.

By: John Baldino