What's the Difference Between Condo and Co-op Loans?

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Condos are more similar to single-family homes because there's a title and deed. Conversely, co-ops consist of share-based ownership structures, similar to corporations. The mortgage application process for both co-ops and condos differ greatly from single-family homes because lenders need to dedicate extra time toward reviewing the finances of the underlying property management board, in addition to your personal finances.

What's the Difference Between a Condo and a Co-op?

When you buy a condo, you're purchasing a piece of property: the actual unit or room in the building. Once you close on the transaction, the condo is yours, and you hold the title and deed to your specific unit in the building.

Co-ops, on the other hand, represent shares in a housing corporation. Although buying a co-op typically grants you the right to inhabit the specified unit in the building, you don't actually own that property. Instead, you own a percentage of the corporation that manages the building.

As a result of these key differences, mortgage lenders treat condo and co-op purchases differently when underwriting and approving loans.

Cost Differences: Which is Cheaper?

Co-op owners pay monthly homeowners corporation dues to cover their portion of the building's overall mortgage, taxes, utilities, maintenance and staff. Condo owners, by contrast, are also responsible for homeowners association (HOA) fees, which cover things like maintenance of common spaces, building exteriors and landscaping. Condo owners also pay their own utilities, annual property taxes and insurance premiums.

In general, a co-op's HOA fees will seem higher simply because they cover more of the property's expenses as a whole. Condo owners are responsible for their portion of shared expenses for communal areas, but pay other individual expenses separately from their HOA dues.

Most buyers will find co-ops to be cheaper, especially in urban markets like New York City or Boston. However, co-ops come with more barriers to entry and regulations than a typical condo. This is due to the increased complexity of securing financing for a co-op purchase.

Loan Options for Condos and Co-ops

When buying a condo or a co-op, your loan options will have much more specific and defined qualifying criteria than other property types.

Conventional mortgages, through Fannie Mae and Freddie Mac, will require that certain conditions be met—usually outlined in a form called a condo questionnaire that the lender will send to the HOA board or management company.

For example, lenders might ask to confirm that your condo complex isn't involved in pending litigation, prohibits short-term vacation rentals, and has a certain percentage of owner-occupied units. For co-ops, the lender will request and review the building's financials to confirm sound management practices and solvency.

Government-backed mortgages through the FHA or VA will require that condo communities be on their approved list in order to qualify. Co-op properties aren’t currently eligible for FHA or VA mortgages.

Cash purchase is another option for homebuyers who have sufficient funds, gift money or other sources of financing. Paying upfront in cash allows you to skip the lender review process entirely.

If co-ops and condos are popular in your area, consider using a local bank or credit union for your loan, as they're likely to have a product designed for buyers of these properties. Generally, lenders that are well-entrenched in a specific area are more likely to cater to homebuyers in that locale.

Minimum Down Payment and Cash Reserves

Your required down payment amount will depend on the loan product you're using, but in general 3% to 5% of the purchase price is the minimum requirement. In hot real estate markets, you may need to put down far more, or pay with all cash in order to get your offer accepted.

Individual co-ops and condo communities may have their own internal down payment requirements, although these are more common (and often more stringent) with co-ops. In some instances, co-ops require at least 20% down plus sufficient cash reserves after covering all closing costs. Cash reserves are money you have in savings, checking and investment accounts after closing. These requirements will vary according to the co-op or condo development you're working with. For example, a co-op board might require you to have three times your monthly housing costs in cash reserves after closing before they will approve your offer.

What's Different About the Process for Buying a Co-op or Condo?

Buying a condo or a co-op is similar to purchasing a single-family home, except lenders evaluate the prospective building and unit as well as the borrowers themselves. Mortgage lenders need to make sure the property is up to their standards, and they'll do so by reviewing the building's (or housing corporation's) recent financial statements, insurance policies and more. While most real estate agents should have these documents on file, the building management may charge borrowers to produce these documents for lenders.

Co-ops Have a More Difficult Approval Process

Co-op buyers must also be interviewed and approved by the sitting co-op board. Buyers must provide financial paperwork, character references and more, and the board will have final say on approving the purchase. If you're considering co-ops in your home search, start compiling your board application and materials early to prevent any delays. Co-op boards usually have the right to refuse an applicant, and they often do so without warning or substantive reasoning.

Condo buyers may need to be approved by the community's condo association before purchasing a unit, but this isn't always the case. Condo boards don't have the same freedom to reject applicants as co-op boards. Some condos do have what's called the "right of first refusal", which allows a board to preempt your purchase by buying the unit on the same terms as you. In reality, few condo boards have the financial resources to exercise this term.

Lenders will also assess the ratio of renters and owners in a prospective condo or co-op building. Most lenders require that buildings have a minimum owner-occupancy rate of at least 80 percent—meaning just 20 percent or less of the residents can be renters. If the number of rentals exceeds the lender's threshold, such lenders will deny funding.

Condos Close Faster

Mortgages for condos typically close faster than co-op loans because fewer parties need to sign off on the purchase. With a co-op, many lenders won't order an appraisal until you've been approved by the board. This can take weeks or months, depending on board scheduling conflicts.

In most cases, co-op loans close in anywhere from 60 to 90 days, while condo closings are similar to industry standards for single family homes (anywhere from 15 to 45 days). In either case, the added complexities of mortgage financing for these property types mean that you should budget more time than usual when buying into a co-op or condo development.

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