For many first-time buyers, a condominium is a good entry into homeownership. Condo lifestyles can be exciting, especially as many are locating in fast-growing urban areas that are seeing a renewal. They’re popular with Millennials just starting out, and retirees, who want to downsize and no longer pay the costs of maintaining a single-family home.
Many amenities, such as pools, gyms, concierge, dog parks, and even spas are now included in developments that are looking to attract both demographics. Moreover, condominiums usually include some utilities in their monthly fees (such as water and sewage), eliminating one monthly bill you’ll need to pay. They can also be excellent investment properties, particularly if they are close to a business center where many young professionals work, a downtown, or a college campus.
Still, condo financing with mortgage lenders is a very different process than that of buying a single family home. If you’re interested in finding out more about your home-purchase options, speak with a loanDepot Licensed Lending Officer today.
Here are some ways that condo ownership and financing is different than single family home ownership you should be aware of when you apply for a mortgage.
The one big difference between a single family home and a condominium are usually the size of the fees. Monthly fees vary, and there can even be quarterly or yearly fees as well. Nevertheless, they have to be paid, and your lender calculates the fees into your out-of-pocket estimates and your debt-to-income ratio. So when you’re shopping for a condo, look carefully at the homeowner association (HOA) obligations and know what it actually covers. Find out about other fees you might encounter, such as parking, pool passes, gym privileges, etc.
All these expenses need to be factored in to your monthly budget estimate, and you need let your lender know exactly what they are in order to calculate your monthly expense burden. Also remember that, while your home insurance payment is usually escrowed with your mortgage payment, your HOA payments typically are not.
Not every loan program works for condo financing
Depending on the development, some may not take all loan programs, such as FHA or VA financing. Communities with a high level of renters compared to owners often don’t qualify for eligibility by HUD, though the requirements have eased some in the past year. Your lender as well as your real estate agent can look up which condo developments are eligible for which government loan programs in your area. Or go here to find out if a particular community is eligible for FHA financing.
Typically, if you are able to qualify for a conventional loan, you’ll be able to buy most condo developments, but there are exceptions. For example, in Florida, where the condo market often goes through boom-and-bust cycles, some lenders won’t finance if the ratio of owners-to-renters in the development is too low or the development lacks sufficient disaster insurance.
The reason for that is if there are too few owners, an increase in an assessment of condo fees spread over too few owners could literally bankrupt the HOA or send owners into foreclosure because they can’t pay the increased fees.
Know the financial condition of your condo association
To that end, a prospective borrower, you’re entitled to know the financial condition of the HOA. Does it have enough paying condo owners to properly keep up with the maintenance? Are there any special assessments coming (for example weather-related damage especially for resort condos) that could dramatically increase your monthly fees? Your lender of course will want to know this as well, and will often require a copy of the condo financial statement before funding the loan.
As a result, condo buyers often have extended protections, especially those in resort communities where you can cancel your contract, for any reason, as well as given at least seven days to examine condo financial documents.
Defaulting on HOA fees can result in a foreclosure
During the real estate downturn of the last decade, many condo buyers who were cash-strapped stopped paying their condo fees, even though they continued to pay their mortgage. This left many condo associations in a bind, as they had difficulty collecting from delinquent owners.
Recently however, courts have ruled that HOAs can indeed foreclose on an owner even if the mortgage is current. In turn, if a condo association started foreclosure proceedings against a delinquent owner, then the mortgage lender had little choice but to follow suit, in order to protect its financial position.
Bottom line, if you buy a condo, make sure to keep current on your fees as if it were part of your mortgage. Still, because the foreclosure process for condo associations and banks can often be expensive and time-consuming, if you run into financial difficulty, you’re likely to be able to work out an arrangement with your HOA, as well as your lender, but you need to communicate with both as soon as possible.
If you’re ready to explore the condo market, speak with a loanDepot Licensed Lending Officer about a purchase loan.
Published April 13, 2018
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