What To Know About Buying A Condo – Forbes Advisor

What To Know About Buying A Condo
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Condominiums can often be a more affordable option than single-family homes, especially when home prices are skyrocketing or you’re looking to build a permanent home in an expensive city.

Condominiums typically have more amenities like a pool or gym and offer frequent outdoor maintenance, which are bonuses, especially if you prefer a hands-off approach to home ownership. However, there are important things to know before choosing to buy an apartment that can make the difference between purchasing the property of your dreams or entering an expensive real estate nightmare.

What is the apartment?

Residential units can be found in many forms within multifamily housing units – in converted townhouses, condominiums or townhomes within a larger community development.

Condominiums can be a primary residence but are also a good option as a second home or investment property in popular vacation destinations like Florida and Hawaii, or expensive cities like New York City, San Francisco, and Washington DC.

They usually come with a written set of different rules and requirements for the lender if you apply for a mortgage. These, along with the Homeowners Association (HOA), dictate what residents can and cannot do with certain spaces – usually an outdoor dwelling. Condominiums and their HOAs can also provide amenities such as building management, swimming pools, gyms, and landscaping services. But it all comes with a monthly HOA fee.

Apartments versus single family homes

While many people prefer a single-family detached home, especially after the Covid-19 pandemic has encouraged homebuyers to move to more spacious housing in suburban areas, there is still a need for apartments.

First, condos usually sell for less than single-family homes, but the trade-off is that they can often be smaller in size. Second, if you don’t have the time or inclination to deal with the hassles of home maintenance, especially outdoors, an apartment can be the ideal option that requires little maintenance.

On the flip side, monthly HOA fees can be quite high, ranging from hundreds to thousands of dollars in major metro areas. This can make your total monthly payments for living in an apartment the equivalent of paying for a single-family home. HOA rules can sometimes be too restrictive, making the accommodations less attractive if you’re the type of person who enjoys renovating a home.

What you need to know before buying an apartment

If you have decided that you prefer owning an apartment, it is important to know what to expect. After closing you have purchased a unit within a building or community development, and you are responsible for its condition within the dwelling.

The actual community building and land are legally owned by the HOA – made up of you and your fellow apartment owners. Then you have a financial stake in the building in addition to the unit you purchased. The HOA board itself is usually made up of apartment owners, which can voluntarily include you, who hold regular meetings to discuss property maintenance, fees, and other items. So be prepared to know that there can be more than just financial involvement in your HOA.

This means that all parties involved have a vested interest in ensuring that the building remains in good condition. Moreover, there are four important factors to consider.

1. Mortgage interest rates

Often times, mortgage rates for apartments can be higher than interest rates for loans for single-family homes. This is because your income and credit profile aren’t the only factors under consideration—the condition of the building and the HOA’s financial resources play a role, too.

Make sure to shop for the best offer.

2. Comfort

Apartments usually come with amenities that are not standard with a single family home. Examples include the construction of concierge services, elevators, gymnasium, lounges, recreational rooms, outdoor maintenance, and garbage collection.

So you may not have to pay for a gym membership you rarely use, mow the lawn on the weekends or have to paint the outside of the house. If water is included, that’s one less bill you have to keep track of.

3. Background costs

It’s important to note that the apartment listing sale price may appear to be lower than a single-family home because it does not include the monthly HOA fee, which you can find just by looking at the details section of the home for sale.

Depending on the apartment and the amenities it offers, monthly mortgage payments plus HOA fees can affect your budget more than a single-family home.

Besides the HOA fee, it’s important to consider other monthly costs such as home insurance.

Also, some HOAs require a one-time capital contribution as part of closing costs when purchasing an apartment. This is usually the equivalent of two months of the apartment fee and goes into the building’s reserve fund. The Reserve Fund is used for future building maintenance, renovations, and other costly repairs such as storm damage.

4. Location

The location is important, both for the quality of life and if you are buying the apartment as an investment. Apartments are often in major metro areas, so if being close to groceries, restaurants, schools or transportation is key, then the apartment is right for you.

Critical Mortgage Requirements

Mortgage lenders tend to ask more to secure financing for an apartment than to buy a single-family home.

For example, as part of their evaluation of your mortgage application, lenders are required to assess the HOA’s financial position to ensure they have the funds to cover major expenses and that their investment in you is safe. This means that they will need to review the building insurance policy and look at the HOA’s financial statements.

Other factors that will affect the review of the lender:

  • Building. If the building is new, your odds of getting a mortgage are higher if the work is finished than if it’s still under construction.
  • Fill. The more units sold within the building, the higher the fees paid to keep the HOA’s finances healthy. As a result, many lenders require that 75% to 90% of units in apartment buildings be sold before your loan is approved.

Your chances of getting a mortgage will also depend on the apartment building and the type of mortgage you are eligible for.

The Federal Housing Administration (FHA) maintains a database of approved apartments eligible for an FHA loan. It allows you to search for FHA approved condo projects by location, name, or condition.

Do your due diligence

The condo union should usually have enough spare funds, replenished by the HOA fee, to cover regular maintenance and any unexpected repairs. However, they will sometimes need a one-time evaluation if there are sudden repairs or a rise in insurance due to storm damage, for example.

Be sure to check your HOA books before purchasing an apartment to ensure you can comfortably cover the monthly fees and any surprise one-time assessments.

Buying an apartment makes you a co-owner of the building, which means that you are equally responsible for its maintenance. A poorly managed HOA, which in turn leads to a dilapidated building, will be detrimental to the value of your apartment in the future.

And if you’re still hesitant, see a professional.

Fannie Mae is the largest buyer of secondary market mortgages, which means that it has a significant impact on the requirements that lenders place on mortgage loans. Their Buyer’s Guide is an important resource that walks you through the important questions to ask your real estate agent, lender, and HOA.

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