Your Ownership Roadmap: Condo Pros, Cons and Mortgage Options

While the pride of homeownership is often associated with buying a house, condos offer a unique appeal for those seeking a simpler lifestyle. With fewer maintenance demands, appealing amenities and a strong sense of community, condos are a perfect fit for those prioritizing convenience and affordability. Plus, choosing a condo instead of a single-family home can also allow you to own in popular neighborhoods at a lower price.

If you’re sold on the lifestyle and amenities that condo living can offer, look no further to learn how to get the loan you need to make your future vision a reality.

What Is a Condo and Does It Meet Your Needs?

A “condo,” short for “condominium,” is a privately owned unit that may be attached, semi-detached or detached within a larger building or complex of buildings in which owners hold an undivided interest in common elements. Condos may look like apartments or townhouses, but they aren’t owned by an apartment complex or paid for through a rent system. Instead, each condo is owned individually, though it may be part of a larger grouping of units.

Many people are particularly drawn to condos for one major reason. While the owner is responsible for maintaining their own individual condo, there’s usually a property manager responsible for the rest. A condo association typically manages landscaping and shared spaces like lobbies and clubhouses, funded by monthly dues paid by each owner.

Is a Condo Right for You?

Whether you want amazing amenities, affordable homeownership or just a life free from yard maintenance, there are many reasons to consider buying a condo. However, there can also be a few downsides to purchasing a condo. Let’s weigh out the pros and cons:

Pros

• You don’t have to worry about exterior property maintenance
• You get to build equity while still taking advantage of apartment-style amenities
• You have the privilege of enjoying homeownership with a comparatively lower price tag
• Condo associations help provide a sense of community

Cons

• You’re limited on remodeling and some lifestyle choices by your condo association
• Condo financing can typically involve comparatively higher mortgage rates, depending on your mortgage lender and the condo itself
• Condos can be harder to sell than a house, if you need to move
• Condos often have very expensive association dues

If a condo sounds right for you, the next step is to explore condo mortgages and how they differ from a home mortgage.

Why Condo Mortgages Are Unique

Whether you are shopping for your first mortgage or a seasoned homeowner looking to buy again, you may be surprised to learn that condo mortgages differ from other types of mortgages.

Condominium communities have to deal with many interdependent factors that don’t impact single-family homes, including occupancy, construction status and the financial health of the condo project. Many of these factors will influence whether you can get a mortgage for a particular condo. Although relatively rare, here are some of the reasons that a condominium could be ineligible for financing:

• The complex contains segmented ownership or timeshare units
• The condo complex contains more than 35% commercial or mixed-use space
• The complex functions as both a condo and a hotel or offers hotel amenities, including the condo association offering short-term rentals for condos in the complex
• The property is a cooperative (or co-op)
• The condo complex is owned by the developer, with condos being leased by the homeowners association (HOA)
• The percentage of condos sold and closed amounts to less than 90% of the total condos in the complex
• There are too many investor-owned units

Your lender can help you determine whether a particular property is loan-eligible.

Qualifying for a Condo Mortgage

After saving for a down payment and gauging your eligibility for condo financing, you’re ready to pick a lender and begin the loan application process.

Choosing the Right Lender

With so many condo mortgage options available, it’s important to talk to a lender who will help you understand the short and long-term impacts of each type. Condo loans have specific requirements, both for the property itself and the type of loan you choose. A knowledgeable mortgage lender can guide you and help you find the most suitable loan for your budget and goals.

Condo-Specific Requirements

Aside from the typical financial and documentation requirements for a loan (proof of income, credit report, down payment, etc.), here are some condo-specific factors that lenders typically assess during the application process:

• Condo delinquency minimums: In a condo complex, it’s essential that the homeowners pay their condo association dues in a timely manner. This allows the condo association to maintain common areas and amenities and generally keep the complex in good physical and fiscal shape. Most lenders require that at least 85% of association dues be paid on time or are no more than 60 days past due.
• No pending litigation: The complex must not be involved in any lawsuits.
• Proper insurance coverage: The condo complex must have appropriate insurance, including hazard, liability and flood insurance.

Condo Financing Options and Requirements

If your condo community of choice has met all the requirements, you’re ready to assess your condo loan choices. Many of the same types of loans available to single-family home buyers, such as conventional, FHA and VA mortgages, are also available to condo buyers.

All loans require a down payment, a minimum credit score and proof of income. However, certain loans have criteria beyond the above requirements that lenders will evaluate. Here’s a breakdown:

Conventional Loans

A conventional loan is a standard mortgage that is insured by Fannie Mae or Freddie Mac. If you’re applying for a conventional condo loan, your lender will need to carefully review your application, the condo complex and the condo association’s operations. Here are some potential things your lender may look for:

• Condo delinquency minimums: As mentioned above, most lenders require that at least 85% of condo association dues be paid on time.
• Condo reserves: Is the condo association saving at least 10% of its budget for future or emergency expenses?
• Occupancy details: Many lenders will want the units in the complex to be at least 50% owner-occupied, but some will have higher thresholds. In addition, they may require a certain amount of the other units in the complex to be primary or vacation homes, not rentals.

FHA Loans

Condos are a popular choice for first-time home buyers thanks to their lower prices. And Federal Housing Administration (FHA) loans are an equally popular funding source for first-time buyers due to:

• Lower down payment options (as low as 3.5%)
• More lenient minimum credit score requirements
• Competitive interest rates

Keep in mind that in exchange for lower down payment and more flexible qualification criteria, FHA loans require mandatory mortgage insurance. This typically involves both an upfront premium and an annual premium, which are added to your loan payments.

In order to buy a condo with an FHA loan, you’ll need to make sure that it meets the following requirements:

• FHA-approved condo list: The condo must be listed on the FHA-approved condominium list.
• Primary residence: The condo you are buying must be your primary residence, not an investment or vacation home.
• Percentage of FHA Loans: The FHA will only allow up to 50% of a condominium complex’s units to be financed with FHA loans at any given time.
• Percentage of owner-occupied units: At least 50% of the units in the complex have to be owner-occupied, regardless of how they are financed.
• Individual owner concentration: For complexes with 20+ units, no single individual can own more than 10% of the total units. In complexes with fewer than 20 units, no individual can own more than one unit.

VA Loans for Condos

Loans backed by the United States Department of Veterans Affairs (VA) are known as VA loans and are only offered to veterans, active service members and their spouses. While VA loan funding is provided by private lenders, the VA guarantees (or “backs”) a portion of the loan, protecting the lender’s investment and allowing them to offer lower down payments and interest rates to buyers.

VA loans can be used to purchase condos as long as the condo complex is approved by the VA. You can check the VA’s condo database to see if the condo you want to purchase is in an approved complex.

If you’re interested in a condo complex that’s not in the approved database, it is possible to ask the VA to approve a new complex, but keep in mind that this process may take time to complete.

A Non-Warrantable Condo

When you start searching for a condo, you might see a property you like that is non-warrantable. This means the condo project doesn’t meet the requirements for Fannie Mae, Freddie Mac, FHA or VA financing. Each agency has its own set of condo requirements for a project to be eligible, or “warrantable.” A condo could meet one agency’s requirements and not another’s, so you need to double-check to see what type of loan you can use to purchase the condo.

Condo vs. Townhouse Mortgage

Townhomes (or townhouses) have a homeowners association (in place of a condo association), common amenities, sometimes a small yard, patio or private garage, and nearly always share a wall with another unit. But keep in mind that a condo can look identical to a townhome. It depends on whether the style is horizontally attached to another unit, semi-attached or a stand-alone structure (detached).

A townhome falls under the classification of a Planned Unit Development (PUD) project and has limitations or restrictions on occupancy and ownership percentages. The financing available and the requirements depend on whether the townhouse is structured as a single-family residence or a condo. The pre-sale and owner occupancy requirements that apply to condominium projects do not apply to townhouses.

Condo Amenities: All the Goods That Come With Condo Living

One of the most appealing aspects of condo living is the access to a range of amenities without the hassle of maintenance. From refreshing pools and state-of-the-art fitness centers, to inviting community spaces and social events, condo living offers a lifestyle that many find both convenient and enjoyable.

Understanding Condo Association Fees

The cost of this maintenance-free lifestyle comes in the form of monthly condo association fees, sometimes called HOA fees. These fees cover the costs of maintaining and repairing common areas, such as:

• Building exteriors
• Grounds and landscaping
• Hallways and lobbies
• Shared amenities (pool, gym, clubhouse, etc.)

Condo association fees can vary depending on the size of the complex, the amenities offered and the level of maintenance required. These fees are not fixed or guaranteed and can be increased (or occasionally decreased) if the association’s needs or reserves change. It's essential to factor these fees into your budget when considering a condo purchase.

Beyond the Fees: Hidden Benefits and Perks

While condo association fees are an additional expense, they may actually save you money in the long run. Consider the costs you'd incur as a single-family homeowner for things like:

• Lawn care and landscaping
• Roof repairs and replacement
• Exterior maintenance and painting
• Gym memberships or access to recreational facilities

Condo living often takes care of these expenses for you, freeing up your time and budget for other things.

Community Perks and Safety

Condo living offers a sense of community and belonging. Many complexes host social events, creating opportunities to connect with your neighbors. Additionally, condos often have enhanced security features like gated entry, security cameras and on-site staff, providing peace of mind for residents.

If you're looking for a low-maintenance lifestyle with plenty of amenities and a community network, condo living might be the perfect fit for you. Just be sure to factor in the fees and weigh the costs and benefits to determine if it's the right choice for your budget and lifestyle.

Let Pennymac Help You Secure Your Condo Mortgage

Getting a condo mortgage may seem complex at first, but working with an experienced lender will simplify the process and help you make an informed decision. If you’re ready to start condo shopping, take the first step: Get pre-approved online or contact a Pennymac Loan Expert today.

Share

Categories

buying a home loan types mortgages