Buying a Condo vs. Buying a House
7 things to know if you’re wondering, “Should I buy a condo?”
Many first-time home buyers—as well as homebuyers who wish to downsize—wonder about the pros and cons of buying a condo. Here are seven things to consider when deciding between a condo and house.
Condo purchase prices are often more affordable
The list prices for condos are often, but not always, less than those for single-family homes. The primary reason condos are less expensive is because they don’t include land. The land condos are built on are owned in common by all the association’s condo owners.
The purchase process for condos
The process of buying and financing a condo is mostly the same as buying a single-family home. Two key differences are that a lender will require paperwork about the condominium community and its finances, and interest rates may be 0.125 to 0.25% higher.
Higher interest rates apply to properties that are non-warrantable under Fannie Mae and Freddie Mac rules. Factors that make a condo non-warrantable include unresolved litigation and ownership by one entity of 20% or more of the community’s units.
Warrantable condos are eligible for conventional loans and lower interest rates.
Like other single-family home purchases, buyers typically make a down payment, there is an appraisal and your debt-to-income ratio needs to be less than 36%.
There’s a second entity with condo ownership: the HOA
A homeowners association (HOA) is the governing body of a condo community. They help preserve property values and quality of life. By their very nature, they impose restrictions that you may or may not find valuable, such as limits on renting or parking recreational vehicles. Learn more about the pros and cons of HOAs here.
The effectiveness of an HOA varies by community. Some are run by board members who educate themselves about their roles along with a knowledgeable property manager. Other condo communities are managed inadequately; they may have high delinquency rates for payment of fees or lack consistent enforcement of rules.
To learn about an HOA’s nature, talk to current residents and HOA board members, review the budget, and read the minutes from at least the last year’s board meetings. If you’re not confident in your ability to analyze the finances and association documents, including the bylaws, hire a real estate attorney to guide you.
Condos always require monthly fees—and sometimes special assessments
When you buy a condo, you’re required to pay monthly fees. The exact amount depends on the services and amenities provided. In communities with limited services, monthly fees may be as low as $100 to $200. Communities with amenities like a clubhouse, fitness center or pool may cost homeowners substantially more; a high-end community may have monthly dues of $500 to $1,000.
HOAs typically set aside a portion of monthly dues in a reserve fund. Reserve funds are savings designated to replace community assets as they age or become damaged. For example, roof replacement, sidewalk repair or road repaving. In Michigan, HOAs are required to have a minimum of 10% of the association’s annual budget in reserve funds.
Sometimes HOAs face expenses that weren’t factored into the annual budget’s operating fund and can’t be covered by reserve funds. For example, extensive damages from a natural disaster. In order to cover the shortfall, the HOA may levy a special assessment.
When buying a condo, remember that you will always pay monthly dues and they will likely go up over time. Also, you have a financial obligation to pay dues and any special assessments; failure to pay could mean you’re forced to sell your home.
Condo owners pay for taxes and insurance
Two more items to include in your budget as a condo owner are property taxes and homeowners insurance.
When you review the HOA budget, you’ll see that the association has insurance. The HOA’s policy covers common assets. You still need homeowners insurance for your unit and belongings.
Read the HOA documents before you buy
Buying a condo means you must abide by the HOA’s bylaws, CCRs (covenants, conditions and restrictions) and any other rules enacted by the association. Before making a condo purchase, read all these documents thoroughly. If you don’t like the rules on paper, you’ll like them even less when you have to live according to them. When you make a purchase offer, you can include a contingency for review and approval of association documents.
Condo associations handle exteriors, yards and paving
Many homeowners seek a condo because the association handles all exterior maintenance. Mowing, snow removal, trash pickup, and paving of roads and parking areas, are managed by the HOA and paid for by monthly fees. For people who work long hours, travel a lot or don’t have the inclination or ability to do maintenance, condos are an attractive choice.
Ready to buy a condo? You can finance your new home with Consumers
We’ve helped thousands of members finance their condos with a home loan. When you’re ready to buy a new home, talk to one of our mortgage loan officers who can answer all your home financing questions.
All loans subject to approval. Rates, terms and conditions are subject to change and may vary based on credit worthiness, qualifications and collateral conditions.