You aren’t alone if you’re wondering how to buy a condo. With soaring interest rates pricing many people out of traditional single-family homes, condo living can make much sense for the right person or family.

So how does a condo differ from an apartment? In a condominium, you’re part of an ownership structure. You own your unit, and you pay fees for its maintenance (for things like windows and doors). You also jointly own the common spaces throughout and outside of the building, which typically includes a gym, gardens, and maybe a party room.

Perhaps you need to be in a specific city where it’s difficult to buy a traditional home. Maybe you don’t drive and want to take advantage of public transit. What about the idea of a condo as a holiday property? Or you might be looking to downsize out of a high-maintenance home.

There are questions you’ll need to ask yourself to consider if condo living is right for you. First, you need to know the differences between condos and single-family homes. You’ll also learn the potential challenges of being approved for financing and how to avoid the pitfalls of condos with problems.

A couple celebrating life in their new condo - view is facing out the window to the city skyline (how to buy a condo)

Crave downtown living? A condo may be right for you (Photo credit: Chinnapong)

How to buy a condo – what should I know?

Understanding the condo rules in the agreement is crucial before buying a condo as an investment, a holiday property, or a year-round residence. Also, ensure you know how the complex is run and how the management staff functions.
If you agree to purchase a condo, you must pay for the shared amenities (as well as their maintenance), such as a pool, clubhouse, or tennis courts. In addition, be sure to ask about homeowners’ association (HOA) fees. You should be aware that extra assessed fees may be included later which cover reserve funds, routine upkeep, and repairs.

What condo fees should I know about?

Condos need a lot of upkeep to stay in livable shape. While HOA fees typically cover lesser repairs and routine maintenance of the complex’s grounds, some problems demand more money than the organization has available, particularly in an emergency.

Several condos periodically charge their residents additional assessment fees to raise a sizable amount for an emergency project in a relatively short time. Changing the roof or fixing public amenities are pricey tasks.

Homeowner associations typically impose special assessments when they need more reserve funds.

Special assessment payments can be assigned to residents evenly, much like condo fees. However, it is reasonable to assume that owners of larger units will contribute more.

These expenses are not implemented monthly or regularly because special assessments are often only imposed during emergencies. Additionally, the amount of each special assessment fee can vary based on the seriousness of the repair.

Special assessments, like condo fees, are mandatory payments. Residents are required to pay their portion of special assessment costs promptly. If a resident doesn’t make payments, the complex’s homeowners association may put a lien on that person’s condo unit, which can result in foreclosure.

A view of a condo lobby with leather furniture and high marble walls (how to buy a condo)

Your condo fees go towards maintenance of shared areas, like the lobby Photo credit: Jokiewalker)

Are condos worth the investment?

For first-time purchasers, condominiums can be a fantastic entry point into the home market. Prices for condos are often less than those for single-family homes. A first-time buyer may also benefit from condo amenities that are not affordable as part of a traditional, single-family house.

Keep in mind that there are many things to think about before investing in a condo. Firstly, where is the condo located? Is it in a sought-after city or town where condos are commonplace? Does the condo have affordable rates and unique amenities you know you’ll use?

A condo in a prime location with first-rate amenities is likely to hold its value and increase over time. Condos you rent out for vacations can be great ways to make money, mainly if the rent you charge covers your mortgage and HOA costs.

How does a condo compare to an apartment or a traditional home?

Money is one of the numerous reasons why a condo may be a better option than an apartment or a single-family home, making it a more cost-effective option in places with rising prices.

Additionally, you can benefit from tax deductions like the interest on your mortgage because you own your condo instead of renting one.

Not to mention the obvious: You’re paying something down that you own, as opposed to paying a living fee in a building. You’ll have something to show for it when you leave.

Money Under 30 also has a helpful tip: Not all developments are approved for loans from the Federal Housing Administration (FHA). In addition, for an FHA loan to be insured, the development should have at least 50 percent of units occupied by owners (or 30 percent for new developments). Learn more about FHA loan requirements for condos here.

What about condo insurance?

The common areas (and the complex as a whole) are typically insured against theft and natural disasters as a percentage of residents’ HOA fees.

However, this insurance, frequently referred to as a master policy, only protects common portions of the complex – it does not cover tenants’ personal property inside individual units. This is an additional cost for which the condo owner is accountable. Residents who wish to insure their personal property must do so independently.

In the event of theft, fire, bad weather, vandalism, frozen pipes, or smoke-related losses, condo insurance, also known as HO-6 insurance, typically protects residents’ valuables and the interior walls, ceilings, and floors of the unit.

Residents are also covered by HO-6 insurance coverage if someone is hurt or loses something else while on their property. Depending on how much insurance you buy up front, this protection, also known as personal liability coverage, typically covers accrued damages between $100,000 and $500,000.

Opt for a policy that covers as much of the interior of your apartment as feasible rather than the cheapest one offered when choosing one.

Condo insurance wasn’t always necessary, but today’s mortgage lenders typically demand that their clients get HO-6 coverage to safeguard their finances in the event of a calamity.

How do I finance my condo?

There are several different types of condo mortgages available:

  • Conventional loans: These loans allow you to purchase condominiums (including for first-time homebuyers) with just 3% down, a minimum credit score of 620, and cancellable private mortgage insurance (PMI), eliminating the need for a 20% down payment. However, they adhere to standards established by government-sponsored organizations Fannie Mae and Freddie Mac, so your condo must be warrantable.
  • To qualify for an FHA loan, you must have a credit score of at least 580 and put down the required 3.5% of the purchase price. To identify condominiums that are FHA-approved or to look up a specific property you’re interested in, use the HUD condominium search tool.
  • VA loans: Veterans, active-duty service members, and qualifying spouses may use a VA loan to purchase a condo. This lending program offers military borrowers benefits that FHA and conventional loans do not, including no mortgage insurance, no loan limits, and 0% down payments.
  • USDA loans: The USDA provides low-income buyers in rural areas with a mortgage with no down payment. You must meet USDA income requirements and show that you can afford the monthly mortgage payments even if there is no minimum credit score required. If you want to know whether condos in your neighbourhood might be eligible, check out the USDA’s property eligibility tool.
  • According to Lending Tree, condo mortgages tend to have higher interest rates than loans for single-family homes by about 0.125% to 0.25%. That’s because Fannie Mae and Freddie Mac view condos as a riskier bet, and, to compensate, they charge the lender an extra fee if you’re buying a condo and your loan-to-value (LTV) ratio is over 75%. Lenders pass this fee on to you by charging slightly higher interest rates.

Luckily you can negotiate your mortgage rate with your lender and, if you’re able to bring at least a 25% down payment to the closing table, you can usually avoid the interest rate hike.

For various reasons, purchasing a condo differs from buying a traditional single-family home. To establish your eligibility for a mortgage, lenders compare your expenses to your income. Your gross debt service ratio should be less than 35% of your pre-tax income (mortgage principal and interest plus property taxes and 50% of your condo fees).

Next, lenders consider your total debt service ratio, which is your pre-tax income divided by all your debts, including your mortgage, car, alimony (if applicable), other loans, and the remaining 50% of your condo fees. This ought to be at most 42%.

An aerial view of several high rise condos on the beach in Florida (how to buy a condo)

It might be love at first sight, but you need to do your research before you commit (Photo credit: miami2you)

How do I avoid condos with problems?

Learn about the HOA and attend a meeting. You should also speak with them to determine if the neighbors are content with how the condo is run. To find out what is protected by the HOA, consult the bylaws. Additionally, you can request copies of the most current board and member meeting minutes and inquire about the amount of previous HOA dues increases.
The board’s history of litigation for taxes and general issues is another area to look at. If you buy, you might discover ongoing lawsuits.

Due to unpaid HOA dues, some condo organizations have been forced into bankruptcy. In addition, lenders might discontinue funding the apartments if they stay caught up on payments, which might impact resale values.

Check the financial records for reserve funds and delinquencies. A good association should set aside at least 25 percent of its gross income for unforeseen events and maintenance. You could have to pay a fee if they run out of money. Check out the most recent property tax assessments as well. If the tax assessment is high, but the sale price of your apartment is low, you can be in for a more significant tax burden than you had anticipated. Ensure that the property’s taxes reflect its genuine value.

Do your research and ask questions

There’s a fair amount of research involved when purchasing a home and a condo is no exception. You’ll be beholden to the building’s rules and need to know if you’re comfortable living within them. But if you find an outstanding development with excellent amenities in the city you’ve been wanting, it’ll likely be love at first sight. Like homes, there are so many different types of condos to consider. Keep asking the essential questions, and don’t settle. You’ll know your perfect condo when you find it.

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