Condo Versus Home Purchase Mortgage Guidelines

This Article Is About Condo Versus Home Purchase Mortgage Guidelines

Condominiums are very popular for first-time homebuyers, millennials, young busy professionals, second home buyers, and the elderly. Condos are also very popular for homeowners who travel often. It is safer to leave a condo vacant versus a single-family home. However, condos are considered riskier investments for lenders. With higher risk, comes loan-level pricing adjustments (LLPAs). LLPAs are pricing hits to par mortgage rates based on rates.

In general, it used to be that you can only get approved financing on condos with FHA loans on condo complexes that were HUD-approved. However, HUD made recent changes where they reimplemented non-HUD-approved condo complexes with FHA Spot Loans. You can now get qualified on non-HUD-approved condos with FHA loans via FHA Spot Loans. In this article, we will discuss and cover qualifying for a mortgage on condos versus single-family homes.

Qualifying And Choosing A Condo Versus Single-Family Home Purchase

How to qualify for an owner-occupied flat and the purchase of a single-family house

Many homebuyers, especially first-time home buyers, contemplate whether to purchase a condo or home. Both condos and homes have their own advantages as well as disadvantages. One of the main reasons first-time homebuyers gravitate towards a condo versus home purchase is due to budget. Many home buyers automatically assume that just because condominium units are generally lower priced than homes, their monthly housing payments are automatically lower. That is absolutely the case.

When I qualify a home buyer for a home purchase and the buyer is very adamant about buying a condo versus a home purchase, most of them tell me is due to the price and their goal is to have the lowest possible monthly housing payment. Condos have condo homeowners association dues where single-family homes do not. Average condo homeowners association dues are $400 which is equivalent to $80,000 in buying power.

Case Scenario Where A Lower Price Condo’s Housing Payment Is More Than A Higher Priced Single Family Home Payment

Let’s take a real case scenario where one of my borrowers who got approved for an FHA loan wanted to purchase a condo. She was looking for a HUD-approved condo for the longest time. Had a very difficult time looking for a condo unit that was HUD-approved. She could not qualify for a conventional loan due to a prior bankruptcy. FHA was the only route to take. My borrower is in her 40’s and I asked her why she was so set on purchasing a condo. She told me that her budget was $150,000. I gave her an analysis of what her monthly condo payment would be. If she put a 3.5% down payment for a $150,000 purchase priced condo, her loan amount would be $144,750.

For simplicity, we will not count the upfront mortgage insurance premium and assume that the upfront mortgage insurance premium will be paid with the seller’s concession and not added to the loan. The monthly FHA mortgage insurance premium for this condo loan is $162.84 which will be added to her principal and interest of $712.08, a 4.25% 30 year fixed rate FHA-insured mortgage loan. Her taxes were $3,600 per year which is $300 per month. Her condo homeowner association dues were $425.00 per month. Adding everything up, her monthly housing payment on this condominium purchase will be $1,599.92.

Condo Versus Home Purchase: Compare Homeowners Association Fees On Condominium Complex

I asked my borrower why she would not consider a single-family home. Her answer was that $1,700 was her maximum monthly budget for a home purchase and that most homes she liked were priced close to $200,000. I told her lets do a case study and pick a home she liked. She had plenty of money for the down payment and the 3.5% down payment was not her major concern but her monthly housing payment was.

On a $200,000 price single-family home, her mortgage would be $193,000 or $949.44 per month with a 4.25% rate. Her FHA annual mortgage insurance premium will be $1,640.50 per year or $136.71 per month. Her principal and interest payment will be $949.44 with a 4.25% FHA 30 year fixed rate mortgage loan. Let us assume her property taxes are the same as the condominium unit’s property taxes of $3,600 per year which comes out to $300 per month. Let’s assume the homeowner’s insurance is $1,200 per year which comes out to $100 per month.

There are no homeowners association dues since the home is not in a gated community. Adding the proposed single-family home payment totals $1,486.15 which is slightly less than the purchase of the condominium. Although the mortgage principal and interest and the FHA monthly mortgage insurance premium are more in the single-family home calculation, my borrower’s housing payment is slightly lower on a single-family home. That is $50,000 more money than her condominium purchase due to the single-family home not having the added homeowners association fees that are associated with the condominium.

Realtor Karry Razik Take On Condo Versus Home Purchase

Which purchase option will be better? Condominium or Single Family House

Karry Razik is an experienced realtor for Remax First Class in Orland Park Illinois.

Here is what Mr. Razik’s views are:

Literally speaking, a condo can be a tough sell in a bad housing market. That’s because, for the most part, a condo is a substitute house. They’re the kind of property people buy only in the most robust markets. But detached houses on privately owned lots tend to be more liquid in all kinds of markets. There’s also the individuality factor. Each house is unique, particularly after it’s been customized by its owners. There’s the greater likelihood it will appeal to specific buyers. Condos, on the other hand, are uniform. They’re so similar that one unit doesn’t necessarily stand out from the rest. If there are a lot of units for sale in a condo neighborhood, it could take a year or more to sell your unit. This is a major reason why condos are often converted to rentals.

Advantages Of Condo Versus Home Purchase

Second-home buyers often select to purchase condominiums over single-family homes. This is due to the security associated with a condo unit. Another advantage of a condo versus home purchase is due to the fact that the condo homeowners association does all the exterior maintenance including the common areas such as hallways, lobby, and exterior. They do not need to worry about a cat burglar in the middle of the night. Or having their neighbors check on their home every other day. Most condominium units are apartments and consist of multiple units back to back so there is a lot of traffic.

If condo neighbor sees anything out of the ordinary, they will most likely notify police. Or homeowners have made arrangements and told them times when they are not occupying condo units.

Many condominium homeowners associations offer amenities such as the following:

  • indoor/outdoor swimming pools
  • tennis courts
  • walking paths
  • fitness centers

For those with hectic lives and those who travel a lot, a condo versus home purchase offers more advantages.  Nothing is free in this world and all of these amenities come with a price tag: 

  • Condos get assessed a condominium homeowners association and some of these condo homeowners association is not cheap

Disadvantages Of Condo Ownership

Privacy is the main disadvantage with condo versus home purchase. Another major disadvantage on condo versus home purchase is condo homeowners normally have very little control. They need approval from the condo association if they want to remodel their units or make substantial changes. Condos also do not appreciate as well as single-family homes.

Most real estate investors do not consider condos as a good investment. Condo Homeowners Associations can also increase monthly condo HOA dues if there is a shortfall in reserves. If a condo complex wants to repair driveways, roofs, windows, landscaping, tennis courts, swimming pools, it needs to be paid by the condo HOA Reserve Funds. If there is a shortage, then all condo unit owners will have their HOA dues increased.

Condo Association Dues On Condominium Complex

What are the fees of the housing association in an apartment complex

 The biggest disadvantage with condo versus home purchase is the levy of condo homeowners association fees, which are extra fees on top of the condo owners’ housing payments.  Condo association fees can be quite costly and the condo association fees can go up throughout the years if the condo complex needs repairs.  Large ticket items such as balcony repairs and roof repairs can really affect the condo association fees where it may sometimes double.  There are condo unit owners who cannot afford these increases in condo association fees and go delinquent on their condo association payments.  A condo homeowners association can file a lien on the condo unit owner who is delinquent on their condo association fees and file for foreclosure proceedings. 

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