FINANCING OPTIONS WHEN CONSIDERING A CONDO VS. A TOWNHOME
With single family home prices continuing to rise, I have received many inquiries on financing a condo or townhome instead since they are usually lower in price.
There are many reasons why one option would be recommended over the other. I am primarily going to focus on the different finance options. I do encourage you to talk with your Realtor to determine what may work best for you based on how long you plan to live in your new home, if you plan to sell it or rent it in the future, etc. As always, I encourage borrowers to reach out to their lender and they can provide you with the many loan options available.
The biggest difference between a condominium vs. a townhome is that you own the land with a townhome and usually this includes a small front and back yard. Because of this, condominiums tend to be lower in price since you don’t own the land.
Interest rates tend to be higher on condominiums since they present a higher level of risk for mortgage lenders. You can purchase a condominium with an FHA loan with a 3.5% down payment, but the condominium project must meet FHA approval. If a project has not been approved by FHA, there are approaches by which a lender can request project approval and inclusion on the list. Lenders can submit documentation to FHA for approval of individual condo units, however, this process can also be challenging and take a great deal of time. You can purchase a condo with a Conventional loan with a 10% down payment. Depending on the condominium project, your lender may be able to obtain a condo waiver that allows a 5% down payment, but it is not the norm.
You can buy a condo with a VA home loan, but it also must be approved by the Veterans Administration. At least 50% of the units must be occupied by the owners and less than 15% of the unit owners are behind on their HOA dues. For recently constructed condos, at least 75% of the units must be sold. If they meet all these requirements, there is a good chance it’s VA approved.
You can buy a condominium with a USDA loan, but it first be in a USDA approved rural area of the country. The condominium project must also be approved by another entity, such as HUD, FHA, VA, Fannie Mae or Freddie Mac.
Applying for a mortgage on a townhome is like applying for a single-family residence. Interest rates are similar, and in most cases, you can follow the same guidelines for a townhome as for a single-family residence when it comes to financing.
FHA, VA and USDA loans require occupancy by the borrower and are not used for second homes or investment properties.
Most people believe they have a better chance of getting approved for a lower priced condominium or townhome vs. a single-family residence. I mentioned in a previous article that for every $10,000 you add to your down payment that you will save approximately $50 per month on your payment. You can use this same simple formula when calculating the difference in a condominium or townhome vs. a single-family residence with HOA dues. If your HOA dues are $150 per month, this is like buying a single-family residence without HOA dues for an additional $30,000! For example, if you are approved for a mortgage on a $175,000 condominium, you might be able to qualify for a single-family residence for $205,000 if the difference between the HOA dues are $150 per month.
I encourage you to reach out to your lender and they can provide you with the many loan options available. Feel free to contact me if you have additional questions.
Branch Manager, NMLS #1721861
Cherry Creek Mortgage, LLC, NMLS 3001