A condo is essentially an apartment that you own. When you purchase a condo, you get all the benefits of apartment renting, such as no outdoor maintenance and a community of neighbors nearby, while simultaneously building equity in your own home. Although a condo and a single-family home couldn't be more different, the process for purchasing either is strikingly similar. You must have money set aside to cover the various expenses involved before making an offer on a condo.
When you purchase a condo, you'll need to have a down payment, money for the closing costs and money for all associated condo fees.
The Down Payment
One major expense you'll encounter when buying a condo is the down payment. Your down payment reduces the total amount you must borrow. Not only does your down payment provide you with equity in your home, it lowers the lenders risk.
The down payment you'll pay depends on a variety of factors, such as how much the condo costs, the loan program you use and who guarantees the loan. If Fannie Mae guarantees your loan, for example, you must put at least 25 percent down on the condo to avoid additional fees. If the condo complex qualifies for FHA funding, however, you can purchase your condo with a down payment as low as 3.5 percent of the purchase price.
Your Closing Costs
A down payment isn't the only lump sum you'll need when purchasing a condo. Lenders don't hand out mortgages for free. You must compensate your lender and pay for various other mortgage processing services. These fees are known as “closing costs.” Closing costs, for example, include charges for conducting a title search, pulling your credit reports and writing your loan.
The closing costs for condos often differ slightly from those of single-family homes. You may have to pay a managing agent fee to the company that oversees your condominium complex. The complex can also request that you pay a move-in deposit. Should you sell the condo and move out without causing any damage, the complex will refund your deposit.
A Steady Income
Regardless of how little you're borrowing, your lender still wants assurance that you're able to make payments on your new loan. Before approving your application, your lender will compare your income to your debts. Your ratio of debts to income determines whether you have enough disposable income to make your mortgage payment each month.
The lower your debt-to-income ratio, the better your odds of being approved for the condo loan. Lenders' policies differ regarding what is and is not an acceptable debt-to-income ratio, but most lenders will work with you if you have a debt-to-income ratio of 36 percent or less.
Paying Condo Fees
Your mortgage payment generally includes the payment on your loan, your personal homeowners' insurance and your property taxes. When buying a condo, however, these aren't the only fees you'll face. As a condo owner, you are responsible for paying fees to the complex for your portion of the complex's benefits.
Condo fees, for example, typically cover maintenance for the complex and the salaries of groundskeepers, security personnel and other condo association employees. They may also include utilities, such as water and sewage costs, and a portion of the condo association's insurance fees. Condo fees vary considerably depending on the complex -- making it crucial that you investigate how much you'll be paying before you sign on the dotted line.
- LendingTree: Understand Mortgage Down Payments and PMI
- Bankrate: Debt-To-Income Ratio Calculator
- National Council of State Housing Authorities. "FHA Issues New Review Requirements for Condominium Loans." Accessed May 11, 2020.
- First Heritage Mortgage. "What Is a Non-Warrantable Condo?" Accessed May 11, 2020.
- United States Government. "Code of Federal Regulations: Title 24, Housing and Urban Development. Part 234, Condominium Ownership Mortgage Insurance." Accessed May 11, 2020.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.