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 multilevel townhouse with a back patio. They are both beautiful. How should you decide?
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Condo vs townhome: 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 and below it. Getting a loan with a townhouse is basically the same as getting one for a single-family house. It’s a much less complicated home loan 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.
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 making up no more than 35 percent of the project.
“If there is too much commercial space in contrast to the residential space, lenders tend to think it is too much of a risk,” Trungale 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.
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Another problem for potential condo owners is trying to buy a unit within a hotel development. The condo owners may get full use of the hotel’s amenities, but it can be tough to get a loan. Under Fannie Mae’s Selling Guide, projects operated like a hotel, with hotel-type services, a hotel name, hotel management or a short-term rental operation, are ineligible.
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 less than 25 percent down on a Fannie Mae loan for a single-family house or a condo, you will take a higher interest rate on the condo than the house.
With a down payment under 25 percent, Fannie Mae charges an extra loan-level price adjustment of 0.75% of the loan amount on a condo (0.125% at 60% to 75% loan-to-value). Lenders usually pass this on as a higher rate or as fees, so a condo loan can cost more than the same loan on a house or townhouse. That means if your condo is $200,000, you need to have $50,000 in your savings to put down at closing to avoid the higher charge compared to if you bought a townhouse for the same price.
How does the HOA affect condo buyers?
Lenders review the condo project as well as the borrower, and each loan program sets project rules, often called warrantability, on things like commercial space and hotel-style operation. There is added risk for the mortgage lender with a condo because the homeowner’s association introduces an added level of variability and potential risk beyond your personal finances. In other words, 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. These monthly fees pay for upkeep to the building, shared amenities, and common areas beyond your unit. If other owners fall behind on the, it’s possible that problems arise with the building that are neglected and never repaired. That makes the value of each unit plummet — kind of like what happened in 2008 during the mortgage meltdown.
Townhouse owners aren’t as beholden to the other unit owners, which is part of the reason these home loans are easier to get.
Townhouses are much easier to purchase than condos
Given the HOA complications and the loan limitations, it’s easier to purchase a townhouse than a condo.
But either way, you’ll need a good credit score and a good income, now and in the future, no matter which type of house you decide to buy. Condos and townhouses also must be appraised upfront to make sure the value is reasonable for the purchase price.
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.
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