Condominium and Townhouse Loans: Differences and Similarities

Your real estate agent has shown you two perfect homes for the same price — one is a condominium with great amenities and the open floor plan you desire. The other is a townhouse with two levels of living and a back patio. They are both beautiful. How should you decide?

Financing Options Can Be Quite Different

“The biggest difference between a condo and a townhouse when it comes to a lender is that with a condo, you don’t own the land. You are typically buying the space between the walls,” says Tony Trungale, vice president and branch manager of First Choice Loan Service Inc., in Austin, Texas.

With a townhouse, you are buying the dirt and everything above the dirt and below the dirt. Getting a loan with a townhouse is basically the same as getting one for a single family house. It’s much less complicated than one for a condo, he says.

“When getting a loan for a condo, you have to go through a process of qualifying as a borrower and also making sure the condo is approved,” Trungale says.

For instance, a condo must meet FHA approval if you are going for an FHA loan. What that means is that the government has certain requirements that the condo must meet before approval. But those requirements are part of a 100-page document. It’s complicated, and some people have built businesses around helping people and condo associations get their condo developments approved.

There are all kinds of loans available for condos including FHA, USDA, VA, Fannie Mae and Freddie Mac. But the condo project must meet specific requirements for each of these loans to go through – meaning the lender may not take on that liability.

For instance, to get a Fannie Mae mortgage for a condo, the condo also needs to be on a list of approved or warranted buildings or developments. The rules include such things as commercial space like restaurants or stores shouldn’t make up more than 10 percent of the building’s space, Trungale says.

“If there is too much commercial space in contrast to the residential space, lenders tend to think it is too much of a risk,” he adds.

Also, if there are more than 50 percent investor-owned condos instead of owner-occupied units then lenders also won’t look at giving you a loan.

Another problem popping up now for potential condo owners is when they are trying to buy a unit within a hotel development. The condo owners get full use of the hotel’s amenities, but it’s going to be tough for them to get a loan possibly.

“For instance, the W Austin Residences are connected to the Hotel W. But it is considered too much commercial for a Fannie Mae loan,” says Trungale.

So, if you are looking to buy a condo, first really determine if the project is Fannie Mae warrantable. If not, there usually is only one in 10 lenders in your area that can do a non-warranted loan program, he adds.

“Anyone can do a Fannie Mae loan. But not everyone can do a condo loan,” says Trungale. “Some lenders won’t offer condo programs at all, or they want much larger down payments plus give significantly larger interest rates for condo loans.”

He also explains condo loans can get tricky if you don’t fit in the right box of what a lender wants to see. For instance, if you put 20 percent down or less on a Fannie Mae loan for a single family house or a condo, you will take a bigger interest rate on the condo than the house.

HSH Associates, a mortgage-data firm, sums up through research that condo borrowers will most likely pay .75 percentage points more on a loan for a condo than for a single-family home or townhouse, unless a down payment of at least 25 percent is made. That means if your condo is $200,000, you need to have $50,000 in your savings to put down at closing or get a higher interest rate compared to if you bought a townhouse for the same price.

Lenders have been wary of condo loans since the whole mortgage breakdown. They aren’t worried just about you as a condo owner defaulting on the loan. They are worried that the other condo owners in your building will stop paying their homeowner’s association dues and that in turn will allow the building to have problems that get neglected and never repaired. That makes the value of each unit plummet — kind of like what happened in 2008 during the mortgage meltdown.

Townhouses Are Much Easier To Purchase Than Condos

“A townhouse is treated like a single family house. You own the dirt below it,” he says.

The biggest similarity is that you still have to have good credit history and a good income, now and in the future, no matter which type of house you decide to buy. Condos and townhouses also must meet the value during the appraisal.

His suggestion to finding a good lender who knows about condos is to ask a local title company.

“They know who turns in the most condo loans and who closes the fastest and which ones have the most excuses for being late,” he says.