Condo Finances
- Adam Garrett
- Sep 19, 2023
- 1 min read
Above: image from a former condo listing of Adam's - image by Adam
In this article, I wanted to go over some of the differences between condos and other houses, especially in terms of finances, & within finances, especially in terms of lending differences.
Differences Outside the Scope of Lending Differences
- Lower Rate of Appreciation
Generally speaking, condos appreciate at a lower rate vs typical homes & townhomes, especially if the monthly fees are high, the homes aren't VA approved or FHA approved, and aren't warrantable (available to typical conventional mortgages).
+ Lower Purchase Price on Resale
Because condos don't appreciate as quickly as townhomes, you'll generally be able to get them at resale at a lower cost than a typical townhome, especially if impacted by those factors reducing appreciation for condos.
+/- More Rules
Often with condos, you'll face more restrictions than with detached single-family homes, and to a lesser degree, townhomes. If condos don't abide by the rules, the appreciation will be lower, such as there not being more than 50% of the units being rented out.
If you're coming from a situation where you were bothered by others in a way where you wish there could be rules that would be enforced, you may like this approach. If you're a Libertarian or are looking to operate a business out of your house or use your property to do a short-term rental, you will probably not like a higher amount of rules to follow.
+/- Higher Monthly Fees, But More Covered
Typically the monthly fees will be higher on condos than on single-family detached homes, and to a lesser degree, townhomes. Did you know that some townhomes have no monthly fee? You'll be hard-pressed to find that from a condo association. The reasons why are multi-faceted, but one of the biggest differences is that more often with condos the association takes care of the maintenance of the exterior of the condo structure & grounds, while with townhomes, this maintenance is more often (but not always) done by the owners.
If you want something where it's easier to not have to hire someone out for work and wouldn't be doing much if any maintenance yourself (i.e. an investor with a large portfolio scattered across many areas), it may take less time from you. If you're an owner with a large family and would get excellent use out of a water bill that is covered by the association, it also may work out well for you. If you're an owner-occupant who is conservative with utilities and do a lot of your own maintenance, you'd probably be better off handling these items yourself, not in an association that covers them.
Lending Differences for Most Loans:
+/- Higher Interest Rates When Putting <25% Down
Unless putting 25% down or more, you'll likely be looking at a higher interest rate with a condo vs a comparable townhome. That means less competition for buyers who have the capital for 25% or more down (decreasing initial costs & appreciation) or higher costs for those who don't.
“On a conventional mortgage backed by Fannie Mae, the rate on a condo will usually run about one-eighth to one-quarter of a percent (0.125-0.250 percentage points) higher than what you'd pay on a single-family home. That's because Fannie Mae charges lenders an up-front fee of 0.75 percent of the loan amount on all condo mortgages with less than 25 percent down. Lenders usually cover this by boosting the mortgage rate to compensate. You can avoid the higher rate by simply paying the 0.75 percent up front, or by making a down payment of 25 percent of the purchase price or more.”
+/- Some Lenders Can't Do Condos
You might be surprised to learn that some lenders can't even do condos. Among those lenders that can do condos, there are many cases where a lender can't do a loan for at least 1 loan type depending on the association, such as associations that are not warrantable for conforming conventional loans, VA-approved, or FHA-approved. These approvals are based on factors like the % of owner occupancy, condo association financial strength, & more. While reducing your options if using a loan & reducing appreciation, it also means less competition & lower starting costs on resale. NACA is able to do condos, but only under certain conditions (See "What property types are eligible..." here).
Lending Differences for VA & FHA Loans:
Check to see if it’s approved for VA or FHA
Lending Differences for Conventional Loans:
Higher Down Payment Requirement In Some Cases, Depending On Lender, With Some No Down Payment Loans Still Available
Even lenders with 0% down conventional loans may require significantly higher down payments for condos. In the example of Garrett Mortgage, which offers a 0% down loan option for true first-time home buyers, they charge a minimum of 10% down for condos typically, though sometimes exceptions may be made for lower amounts. That said, a loan broker I work with who is unaffiliated to GRP offers as low as 3% down conventional condo loans. NACA, which is a non-profit conventional product, is an example of a conventional 0% down condo loan.
How to Check if an Association is Approved?
Option 1 - check with the association
Option 2 - check with a lender
Option 3 - if it’s approved for VA or FHA (check here), it’s likely warrantable, but in some cases, it won't be VA or FHA approved but will still be warrantable for Fannie Mae & Freddie Mac conventional loans
Option 4 - check to see recent sales in the same association
Option 2:
CPM has a list of non-warrantable complexes.
According to https://singlefamily.fanniemae.com/media/30511/display
“Q2. NEW How can I gain access to CPM if I am an approved seller/servicer? Approved Fannie Mae Seller/Servicers already registered for CPM can access the application through the link on the Fannie Mae portal. Link here: CPM Launch App. (also here)
Q3. NEW How do I register for access to CPM if I am not an approved Fannie Mae Seller/Servicer? We anticipate correspondent originators who are not approved Seller/Servicers will be able to request access by May 1, 2023. These third-party originators will receive separate communication on how to access CPM through Technology Manager.”
Ineligible characteristics for condos with Fannie Mae
Source: https://singlefamily.fanniemae.com/originating-underwriting/condo-co-op-and-pud-eligibility
Ineligible characteristics for condos with Freddie Mac
I've read elsewhere (1, 2) that at least half of the units need to be owner-occupied.
Conventional Loans Available for Non-Warrantable Associations
If not warrantable, there are likely still some options, though down payment requirements and interest amounts will typically be higher & a significantly lower amount of lenders will be able to provide a loan.
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