Obtaining a mortgage to purchase a condominium works differently than getting a loan to buy a single-family home. Dollar for dollar, a typical condo loan will have stricter requirements and higher costs than a home loan for a standalone house at the same price.
How Are Condo Mortgages Different?
Basically, mortgages for condo units are more expensive than mortgages for typical single-family homes. This is due to the fact that the value of a condo unit is subject to additional risk factors, many of which are outside the borrower's control. To account for these risks, Fannie Mae and Freddie Mac establish higher eligibility standards on conventional condo loans.
Minimum Mortgage Requirements for Condos vs. Single-Family Units
|Interest Rate||Higher rate due to 0.75% lender fee||-|
|Approval Based On…||Borrower and condo association||Borrower only|
Both the down payment and interest rate on a condo mortgage will be higher than they would for a regular house at the same price. Lenders charge more for loans on condo units because their value depends on more than just the borrower's financials. If the condo association as a whole is struggling financially, every unit in the condo project can lose value as owners default and condo fees go unpaid. Fannie and Freddie also have specific guidelines for condo projects that qualify for conventional mortgages.
Conventional Loan Eligibility Guidelines for Existing Condo Projects
|Occupancy||At least 50% of units are owner-occupied|
|Ownership||No one owner holds more than 10% of all units|
|Reserves||Association puts 10% of annual revenues into long-term reserves|
|Zoning||No more than 25% of square footage is commercial/non-residential|
Essentially, lenders will not finance the purchase of condo units if the project as a whole looks like a risky investment. Higher vacancy and fewer owners living in the project mean that each unit pays a bigger share of the association dues, making the whole project more likely to fail if just a few owners default. Lenders also look at the financial structure and history of the condo association to find out if there are any signs of trouble on the horizon. These requirements are somewhat more relaxed for newly constructed or renovated projects.
These characteristics are all determined by property owners, management companies and condo associations that you have no control over. As a prospective owner, you can't do much to change them other than to shop for a unit in a different development. If you run into problems getting a conventional condo loan because the project you're considering falls short of the criteria above, one alternative is to find a private lender offering non-conventional mortgages at a much higher interest rate. However, you should be wary of investing in any project that falls short of these basic requirements.
Fannie Mae, Freddie Mac and the Federal Housing Administration have slightly different requirements from one another, with the FHA using the strictest requirements for a condo loan. Getting an FHA loan for a condo allows you to reduce the amount you need to put into your down payment, but the Department Housing and Urban Development publishes a list of HUD-approved condo projects that you'll need to reference first. In addition, FHA loans all require an upfront mortgage insurance payment that will negate some of the advantage you get with the lower down payment.
Condo Mortgage Rates
To find out how much higher interest rates go for a condo loan compared to a regular mortgage, we obtained online estimates from lenders that provides both. We set a purchase price of $200,000 and a down payment of 20% on both loan types.
30-Year Fixed Rate Mortgages for Condos vs. Single-Family Homes
Online estimates from Chase Bank and Wells Fargo showed that the rates for condo mortgages were higher than the interest rates for single-family home loans by 13 to 25 basis points, not including the effect of mortgage discount points. Although the difference in monthly payment seems small, remember that condo association dues are a mandatory addition to your bill. These dues run at an average of $200 each month. Some single-family homes may come with similar homeowner's association (HOA) fees, but they're still an avoidable expense.
Calculating a Condo Mortgage Payment
Compared to the monthly payment calculation for a regular mortgage, the main difference in calculating a condo payment is the addition of monthly dues charged by your condo association. If you're taking out a condo loan with less than 20% down, you'll have to factor in the cost of mortgage insurance premiums as well.
Example of Monthly Costs in a Condo Mortgage
|Principal and Interest||$872|
While the costs of your mortgage definitely make up the biggest part of your monthly expenses on a condo, there are plenty of other expenses that you need to consider when you're deciding on an appropriate price point. The example we used assumes a property value of $200,000 with 10% in down payment, which triggers the requirement for a mortgage insurance premium. Putting down at least 20%, while expensive, will eliminate this monthly premium altogether.
However, you'll still need at least some amount of condo insurance to protect your belongings and any external features (like windows) that aren't included in your condo association's master insurance policy. Your condo insurance premium will go up or down depending on how comprehensive the master insurance policy is, so it's important to obtain those details before you go shopping for your own insurance.