Buying A Condo? Here's 5 Loan Tips

Condominiums make an affordable alternative to purchasing a single-family home. As prices continue to rise in Sonoma County and Santa Rosa, purchasing a lower-priced condo makes for an attractive choice in pursuing home ownership.

Quick Terms

PITI- an acronym for principal, interest, taxes, and insurance. This is also your total mortgage payment which includes the carrying costs associated with owning a home.

HOA-homeowners association- commonly referred to the monthly homeowners’ association payment. Can by anywhere from $80-$500 per month, varies from home to home.

PMI- stands for private mortgage insurance which is required when buying a property with less than 20% down this is also factored into the total PITI as is the homeowners’ association payment.

Tip 1 Understanding A Homeowners’ Association

A homeowners association is a legal entity, a governing body made up of the Board of Directors which controls the budget of the complex and/or the community in which the property is located in. The association has specific property characteristics creating uniformity amongst the units within the community or the complex in which the HOA oversees. This is why condominiums typically look similar to each other much like an apartment because each individual unit owner is responsible for paying the monthly HOA payment which takes cares of ensuring the complex standardization.

Tip 2 How Condo Stacks Against A Single Family Home

Take a condo priced at $200,000 and single-family house priced at $300,000 using a 30 year fixed-rate mortgage at 4.375%. Assuming down payment of $20,000

Condo

Price $200,000
Loan amount $180,000
Principal and interest $898
Property taxes (based at 1.25% of sales price) $208
Hazard insurance $20
HOA payment $400
PMI $90

Totaling: $1616 per month

Calculating payments on a house

Price $300,000
Loan amount $280,000
Principal and interest $1397
Property taxes based at 1.25% sales price $312
Hazard Insurance $60

PMI $140

Totaling: $1,909 per month

Tip 3 Know The Effect The HOA Payment Has On Buying Power

In exchange for $100,000 in buying power, that translates to a monthly payment difference of $293 per month. In this example, that’s 73% of the homeowner’s association payment.

Mortgage tip: the most important on the factor in deciding to buy a condo is knowing how much the HOA payment has on ability to buy in terms of sales price. The higher the HOA payment the lower the sales price, higher the sales price lower the HOA payment.

Because of the weight on buying ability a homeowners’ association payment has, it would actually cost more on a monthly basis for a condominium than a single-family given the same sales price. Because unlike the house, the homeowners’ association payment is an additional fixed carrying cost that does fall off or go away the way an ancillary fee can such as PMI can ( upon accumulating 20% equity).

Tip 4 Condo Loans May Cost More

Condo’s due to their specific rules and regulations, with adherence guidelines, always has the chance of opposition from a disgruntled homeowner.

It is quite common, associations have ongoing litigation issues from disgruntled homeowners which can potentially make buying unit in that complex problematic.

Key is to make sure the property is lendable and that there is no warranty issues associated with the complex. Additional warranty concerns the lenders might have could involve the complex being unwarrantable to Fannie Mae or Freddie Mac meaning undeliverable to either agency due to unfinished units and costly litigation stemming from other parties. Your real estate agent could be best source for finding out up front what about whether the property you’re looking at is lendable or not (usually in listing descriptions).

• Occupancy –if your intention is to rent the property out upon closing escrow, your interest rate and costs will be higher than it would be if you live there as a primary or secondary home
• Less than 20% down, a high loan-to-value mortgage such as 95% financing (5% down is the minimum down payment needed on a condo) will also bear a higher interest rate than more skin in the game, at 10% down or more.

Tip 5 Is The Property Really A PUD?

Some condo’s are actually planned unit developed (PUD’S) which are a cross between a condo and single family home. PUD’s have almost identical HOA ownership. Pud’s have three unique attributes that make them a strong alternative choice:

1. Hoa payments are usually much lower
2. Pud’s do not need FHA approval from HUD the way a condo does (akin to financing an single family house) meaning the down payment is as little as 3.5%
3. Can be large and mirror a single family home and are often built into planned communities than involve communal benefits like a pool or a family park

*Note- Sonoma County to date has no mortgage HUD approved condominium projects, meaning an FHA Loan can be used on the PUD property.