Buying a Condo: What are my Loan Options?

Condos are popular among first-time North Houston homebuyers for several reasons:

• The average condo costs less than the average single-family home. According to the National Association of Realtors, year after year, the median sales price of a condo in the U.S. is around $10k less than an existing single-family home.
• Condominiums require less maintenance.
• Many condo complexes offer amenities like gyms and pools that are attractive to young, active owners.

However, there are many important differences between buying a condominium and buying a single-family home.

• Community associations
• Insurance
• Living space and neighborhood type
• Yard size and appearance
• Maintenance
• Convenience and amenities, such as security
• Utilities
• The need for transportation
• Obtaining financing for purchase

Community Associations
Both condo associations and homeowners’ associations (HOAs) found in single-family neighborhoods have many similarities.

• Both are created by the developer, governed by a board elected by the property owners, and assess membership fees for all members to pay.
• Joining a condo association or HOA is mandatory.
• Both are responsible for maintaining, repairing, and replacing common areas, which may include the parking lots, sidewalks, green spaces, playgrounds, swimming pools, and other recreation facilities.

There are also some differences between condo associations and an HOA:

• Homeowners’ associations in single-family home communities must approve any exterior additions, alterations, or improvements to a home. However, condo associations have much more power
• They can dictate whether you can buy the condo in the first place, to whom you can sell it, how you can market it, whether you can lease it (and for how long)
• They also decide what you can do to improve the unit’s interior, and what you must do to maintain it.
• A condo association can also regulate pets, outdoor furniture, and parking spaces.
• The condo association is responsible for the maintenance, management, and insurance on all the common elements of the building itself, as well as hiring staff and contractors to do repairs and maintenance.

Insurance
The insurance responsibilities are different for single-family home and condo owners. Condo owners have the advantage, as they are responsible only for what is inside the drywall of their unit, the furniture, kitchen and bath fixtures, and flooring. A condo owner is not responsible for common areas, structure, or exterior, as these are all covered by the condo association’s master policy. Single-family homeowners, on the other hand, are responsible for their entire home as well as their land.

Condos Require Special Underwriting
When you are buying a single-family home, the underwriting process is pretty straightforward and easy. The mortgage lender has the home appraised to ensure it is worth what you are paying for it and that there is a clean title. However, the fact is that condos can be more difficult to buy – at least with a mortgage – than single-family homes. This is especially true if you want to use an FHA or VA loan to buy your condo.

“Condo financing is different from financing a single family home”, explains one mortgage expert. “If you are buying a condo, the bank offering your mortgage begins the underwriting process by evaluating whether you have the means and credit to repay the loan, and assessing the property you are buying.” Simply put, the bank wants to know that if you default on your mortgage, it can sell your property and recoup most of its money.

Certain factors of condo financing began playing a larger role in the underwriting process following the housing crash in 2008. Now, when you buy a condominium, the bank considers additional factors such as:

• The Percentage of Owner-Occupied Units
• The lender considers the number of rented and vacant units as barometers for the property’s potential to maintain its value.
• The Condominium’s Documents
• Condo associations are governed by legal agreements. Condominiums have slightly different legal agreements and none is perfect. The bank will look for any red flags in the condo documents that might create a situation that would cause the property to depreciate.
• The finances of the Condominium’s Homeowner’s Association
• If other condo units on the property are in foreclosure, or the owners have stopped paying condo fees it is a sign of a potential problem.

“It is easiest to finance a condominium with a conventional mortgage that meets the underwriting requirements listed above”, offers another real estate expert. There are additional restrictions placed on FHA and VA loans used for condos.

FHA and VA Condo Loans
One mortgage expert explains, “…as a first-time homebuyer, the relaxed credit requirements and lower down payments (as low as 3.5%) make loans backed by the Federal Housing Administration (FHA) attractive.” However, they warn that the condo approval process for financing includes a variety of factors the buyer cannot control. These requirements include:

• At least 50% of the condo units must be owner-occupied.
• No more than 15% of the units in the complex can have association dues that are more than 30 days in arrears.
• No more than 30% of the units in the complex are financed by existing FHA loans.

Veteran Affair (VA) loans provide financing to qualified veterans with little money down. However, the entire complex must be approved by the Department of Veterans Affairs in order for a buyer to purchase a condo unit with a VA Loan.

Our expert recommends checking online for a list of FHA or VA approved condos and townhomes in North Houston to make sure you limit your search for a condo to those the bank will approve.

Steps to Take When Buying a Condo
If your desire is to buy a condo and you need a mortgage, do not despair. A few simple steps can avoid disappointment that might arise if the bank will not approve the condo you want.

• Begin by working out your budget so that you know how much house you can afford.
• Begin the process of getting a mortgage pre-approved. This tentative commitment from a specific lender for mortgage funding gives you a letter of commitment stating how much a lending institution is willing to loan you for your home or condo purchase.
• Find a buyer’s agent experienced with condos and locate units you like, paying attention to their FHA/VA status.
• Before (or in conjunction with) making an offer on the condo you find, ask to see the condo documents. Also, ask the sellers the same questions the banks will ask about the association finances and owner-occupied units. You may be able to spot red flags right away.

Whether you decide to purchase a single-family home or a condominium, educating yourself on the differences, and the steps to take before your purchase, help the process become smoother, easier, and more enjoyable.