Condos 101: Tips for Finding and Financing Your Condo

When it comes to housing options, there’s a diverse array to choose from: multi-family homes, single-family houses, townhouses, co-ops, manufactured homes, modular homes, and apartments. Among these, there’s one distinct type that stands out: the condominium, often referred to as a “condo.”

What Make a Condo a Condo?

A condominium is a unit within a multi-unit structure, such as an apartment building, or on land owned in common, like a townhouse complex. Unlike renting an apartment, owning a condo provides you with actual ownership.

Unique Features of Condos

Shared Amenities: Condo residents typically enjoy shared amenities and common areas, which are partially owned by owners in the complex. These can include parking lots, recreational rooms, lobbies, roof decks, green spaces, swimming pools, and gyms. Some amenities, such as golf courses or gyms, may charge fees or there will be higher COA fees to include memberships.

Condominium Owners’ Association (COA): The COA, typically mandatory, is comprised of elected condo owners or a management company and oversees maintenance and services. This includes hiring professionals for repairs, landscaping, and managing common bills (such as outside lighting, water, and insurance).

Rules and Regulations: Condo associations have and enforce specific rules and governing documents. These include the Declaration, Bylaws, and a comprehensive rules/regulations document. Expect more rules than you’d find in a typical neighborhood. These regulations cover aspects like exterior changes, pet policies, parking allocations, and more. Understanding these guidelines before purchasing is crucial. While it may seem stringent, these rules protect both the association and individual owners from potential challenges.

Monthly COA Fees: Condo fees, which cover maintenance and payments for service of the common areas, vary but usually range from around $100 to $700 per month and are mandatory. High-end complexes with features like pools and gyms may have higher fees. Over time, these fees may increase as service costs rise so it’s essential to factor this into your budget. These fees also contribute to the condo reserves.

Condo Reserves: Think of condo reserves as a savings account. They fund significant shared area projects like roof replacements, paving, exterior repairs, and landscaping enhancements. A good association should be putting anywhere between 15-40% of their fees into their Reserves Fund. The more shared amenities an association has, the higher the reserves savings should be. The reserves should be able to cover most major repairs and replacements, otherwise a special assessment may be necessary.

Special Assessments: Occasionally, a COA may levy a special assessment when major repairs (e.g., roof or elevator) are needed, and reserve funds fall short. Owners then pay an extra fee to cover these additional expenses. It can be a one-time payment or added incrementally to monthly fees until the assessment is settled. Older condo buildings are more apt to be presented with imminent repairs compared to newer complexes. Ask about the reserves and the COA’s short-term (1-year), medium-term (5-year), and long-term (10-year) plans for upkeep. Also, inquire about the frequency of special assessments over the past decade. This information sheds light on the complex’s health and the quality of management.

Minimal Exterior Maintenance: When you own a condo, bid farewell to mowing lawns, shoveling snow, and fixing roofs. These tasks become someone else’s responsibility. Whether you’re busy, dealing with health issues, or simply prefer a maintenance-free lifestyle, condos offer a significant benefit.

Enhanced Security: Many condo complexes provide gated entries, doorkeepers, or security professionals. Living close to others can offer reassurance and reduce the risk of break-ins.

Affordability: Condos typically carry lower price tags compared to single-family homes. For first-time homebuyers, this affordability allows you to build equity, which can later be used toward the down payment on a single-family home.

Helpful Tip: Before diving into condo ownership, familiarize yourself with the rules and governing documents Also inquire about fee and special assessment trends over the past decade. This insight will give you a good idea of what it will be like to live there.

Financing Your Condo

Once you’ve found your dream condo, it's time to consider financing options. Both your personal finances and the financial health of the condo community are taken into consideration by a lender.

Research Diligently: When exploring condo ownership, thorough research is essential. Look for well-run, financially stable condo associations and request a copy of their governing documents to get a sense of how well it is run. Their track record matters as much as yours when it comes to financing.

Appreciation Potential: Condos may not appreciate as rapidly as single-family homes. If you view your condo as a steppingstone to future home ownership, investigate the area and the complex. Choose a condo in a growth-oriented neighborhood to maximize equity gains.

Warrantable vs. Non-Warrantable

You will need to determine if the condo is warrantable or non-warrantable since this designation will impact loan terms and eligibility.

Warrantable Condos: Warrantable condos adhere to federal guidelines that cover the entire condominium complex. These guidelines address various aspects, including the COA, by-laws, budget, and master insurance policy. Warrantable condos are considered straightforward for financing purposes and meet the standards set by government-sponsored entities like Fannie Mae and Freddie Mac. Your realtor or banker can help determine whether the condo is warrantable or non-warrantable. Or if you like to do things yourself, you can also check the VA and FHA approved condos lists. If the condominium complex is on the list, it’s likely fully warrantable. However, if it’s not listed, it could be because no one in the association has attempted to get it VA or FHA approved.

Non-Warrantable Condos: A little trickier to finance, non-warrantable condos do not meet all the federal guidelines established by Fannie Mae and Freddie Mac. Financing such condos can be more challenging due to their distinctive features.

Common Reasons for Non-Warrantability:

• Ownership Concentration: A single entity may own too many units in the project.
• Owner Occupancy: When less than 50% of the units are owner-occupied or used as second homes.
• Delinquent Association Dues: If more than 15% of the units are behind on their COA payments.
• Lawsuits Involving the COA: Legal issues can impact warrantability.
• Commercial Space: If commercial space exceeds 35% of the total building square footage.

If you’ve set your heart on a non-warrantable condo, don’t be discouraged. Financing is still possible, and you might even have room to negotiate a lower purchase price due to the unique financing challenges. Many lenders specialize in condo loans. Your realtor can guide you to these experts. They understand the intricacies of non-warrantable condos and can help you find suitable financing options.

• Less Favorable Terms: If you’re approved for a non-warrantable condo, anticipate less favorable terms. These might include a higher down payment or interest rate. Lenders perceive more risk with non-warrantable properties.
• Risk Assessment: Lenders weigh the risk associated with non-warrantable condos. While this affects terms, it doesn’t necessarily mean you won’t secure financing.

Is a Condo Right for me?

Living in a condo can be an excellent decision for many individuals. However, before you commit, consider the following steps:

Homework Matters: Research the condo’s financial health. Understand its reserves, budget, and overall stability. Review the by-laws to ensure you’re comfortable with the rules governing the community.

Expert Guidance: Choose a realtor and lender experienced in condo sales. Condo purchases differ from conventional home loans. Their expertise will prove invaluable throughout the process.

Investment Potential: Condos can be a great investment if the timing aligns with your goals. Assess the market and the condo’s location to gauge potential appreciation. Whether you’re a first-time buyer or a seasoned homeowner, condos are often a great solution for many lifestyles. Doing your homework and working closely with an experienced realtor and your trusted lender will lead to a rewarding condo-buying experience.