Phil: 0:00

On our last episode, we went over the pros and cons of your first home being a condo or town home. Today, we'll be talking about the next big step paying for it. We're diving into how loans work for condos and town homes, how they differ from detached single-family homes and what to expect when you're ready to make your move. I have one of our resident experts on condo and town home financing, sarah, who will be helping us navigate through this. Sarah, welcome back.

Sarah: 0:34

Thank you so much for having me.

Phil: 0:36

All right, so let's start with what kinds of loans you can use for a condo or town home.

Sarah: 0:42

This could include the most common, which is conventional loans. A lot of times you can do FHA loans and most of the time, va loans as well.

Phil: 0:52

Now, are there any specific requirements or benefits of using each of these types with a condo?

Sarah: 0:58

Typically the most common way to finance a condo is through a conventional loan. VA loans are also accepted on condos but FHA loans do have some restrictions where they do need to be preapproved for that association. If that condo association is not preapproved, we'll need to go through a process called a spot approval and the lender will get all of the documentation needed and send that in and be able to get that approved.

Phil: 1:32

And in order to do that, you do need to have a cooperative HOA someone there that's going to be able to help you get all of that paperwork set right.

Sarah: 1:40

That's correct. You're going to need what's called a condo questionnaire, but you're also going to need additional condo documents and you're going to need someone at the association, at management company, to be able to help assist with these, because a lot of times they need things like the full condo insurance.

Phil: 2:03

One of the things that you'll have to understand is that this is something that goes on on the lending side, and they work heavily with the listing agent and with the HOA. This isn't something, as a buyer, that you're typically going to have much involvement in, although you'll be aware of what's going on. A lot of the documentation has to do with things like insurance and the types of existing residents, whether they're investment properties, rentals, things like that. Now did you want to dive a little bit more into the kinds of things that are actually looked at and why, in some cases, it may be really hard to get an FHA loan?

Sarah: 2:41

If there's any safety issues with the condo or not enough insurance with the condo, they will require additional items that the management company is going to have to work with the third party to get the spot approval taken care of so that this can be FHA financed. Now there are additional costs to the buyer in most cases for things like this, because you're going to have to pay for the condo certificate, for the condo questionnaire and for anything else that the spot approval company is going to require. It does come at an additional cost, but because condos are so much overall more affordable as a first-time buyer, it's definitely something to consider.

Phil: 3:29

This is one of those great advantages of having a really good real estate agent and lending team who knows that a condo that maybe on the surface doesn't look like you'd be able to get an FHA loan and so it removes a large portion of people who would buy could actually get it approved, And so it could put you at a competitive advantage if there's condos that have been sitting on the market because maybe they just don't have a lot of people who have the conventional loans that are approved for it.

Sarah: 4:01

And with all of the guidelines coming down stricter, making it harder to get conventional financing to a first-time home buyer, it does make it really advantageous as an FHA trying to get this spot approval done. We are seeing more and more of these every single month And I think it's the affordability factor.

Phil: 4:25

Now can you touch on one thing you might come across as a buyer, and that's occupancy ratio. How does that align with this overall condo approval process?

Sarah: 4:36

So if a certain amount and it honestly depends on the condo association where it's located that also plays a factor into it. Let's say, all of the condo association is owned by investors and every single unit is an investor unit, it's not going to be a great candidate for an FHA loan or even a conventional loan. These are some of the questions that come up on the condo questionnaire that the lender will send to the management company for them to fill out like this because it makes it not eligible for financing.

Phil: 5:17

For a lot of first-time home buyers that are listening out there when we're looking at the occupancy ratio and that really is looking at how many of these are owner occupied meaning this is where you live versus someone that owns it as an investment property and they're renting it out. Why having a high rental ratio would be a bad thing and would be harder to get financing in a condo association.

Sarah: 5:41

When 2008 happened, a lot of people were walking away from their investment properties. Lenders don't want to risk lending in a community where everyone is going to walk away.

Phil: 5:56

What really happens here is because of 2008,. A lot more restrictions were put into place because what happens when you have a large percentage of the units are rental units and if, for whatever reason, they're really hard to rent, they'll typically go into foreclosure and they're gonna lower the overall property value. And again, you don't want your entire block to be full foreclosures. So this is really a risk mitigation factor from the lenders, making sure that it's gonna be in an area where a lot of people who live there are the owners.

Sarah: 6:31

Correct You wanna make sure that your economic occupancy rate is higher for owner occupied than for investor owned.

Phil: 6:42

And that makes a lot of sense. You're really trying to make sure that the people who own the homes are living there, and that's just gonna be better for the overall community as well.

Sarah: 6:51

Absolutely. It also helps keep property values up and stable.

Phil: 6:56

Now I wanted to talk about one of the things that all of these are gonna have, and that's gonna be a homeowner's association, and some of these fees are going to be higher than your normal detached single family homes. I was hoping you could maybe talk a little bit about, as a lender, what you have to do when considering these fees in an overall debt to income ratio calculation.

Sarah: 7:19

So with debt to income ratios. I know that we've touched on this before, but debt to income or DTI, means your debt divided by your income, right, and that gives you those ratios. So what you want to make sure of is, even though your HOA is going to be a separate payment it's not going to be paid through your mortgage We still have to calculate that payment as though it were in your mortgage. So because it is a monthly payment going to your house. So the higher the HOAC, the higher your monthly payment is going to affect these scores.

Phil: 8:08

I want you guys to also remember that these HOA fees range significantly. I've seen condo HOA fees as low as $100, $150, and I've seen some in the thousands. So it all depends on what the homeowner's association is. You might find a really good deal on a condo from a price standpoint, but the HOA might be $1,000 a month and that just puts your ratios out of reach. You have to weigh the cost of the condo with the HOA fee. So when you're using the different calculators and we have a payment calculator on the website you can add the HOA into there there's a field for it and really see how that's affecting your overall cost and to see where that lies for you. So I wanted to talk about the FHA loans a little bit more. A lot of our first-time home buyers are looking at the FHA loans And just to talk maybe a little bit about the criteria that might be different for a condo versus a detached single-family home. Are there any actual differences when we're going through even just the initial application, through just general qualifications on the property?

Sarah: 9:24

No, the only difference is that we need to keep in mind and work closely and have great communication with your realtor. If you are looking at condos, if you're approved for, say, a $500,000 loan amount and in that is roughly $150 HOA fee a month, if anything is changing, if that fee goes up, we need to know about it as soon as possible because that could affect what you're actually qualified for. So if you're thinking about looking at condos, be very honest and very upfront with your lender and with your realtor And this way we can qualify you best, so that there aren't any surprises once you go into contract and you no longer qualify, because this condo that you went into contract with has a $500 a month HOA fee and a special assessment that isn't going away anytime soon and now you don't qualify.

Phil: 10:29

I would definitely talk to your lender, have your real estate agent look at a few ranges of condos that might be in the area and they can look at past sold ones as well to get an idea of what that range of costs are and to have your loan officer give you an understanding of what your buying power would be between the different HOA amounts, anywhere ranging from maybe $150, if that's kind of on the low end, upwards of if the high ends $500 or $600, have them run that scenario for you and that way you can understand how does that affect your buying power, because you may find that the condo with a $500 HOA Is a lower amount or maybe it's right there and it works for you. But you really need to know before you go into that process, just like knowing what your loan amount max is. This will affect that, and so it's really important to make sure to have that conversation.

Sarah: 11:25

Absolutely.

Phil: 11:26

Is there any kind of difference from a single family detached home to a condo as far as the property qualifications, beyond just needing to be an approved FHA?

Sarah: 11:39

Yes, absolutely So. if there's any kind of lien or judgment against the condo association, it's going to make it very difficult to get financing of any kind. However, we can still go conventional a lot of times with that, just as long as it's not for safety or the condo association isn't going through bankruptcy.

Phil: 12:03

And what is a non-warrantable condo?

Sarah: 12:07

A non-warrantable condo means that the condo cannot have financing on it. It would be a cash property.

Phil: 12:16

And is there any way around that? Are there any kind of loan programs that you can use on a non-warrantable condo?

Sarah: 12:23

Not that I'm aware of for the time being.

Phil: 12:26

That's something to definitely discuss with your real estate agent. They'll be able to tell you if the condo you're looking at is a non-warrantable condo And that usually means there's major things like there's a lawsuit going on with the HOA or maybe they don't have their insurance anymore. It's to protect you. You don't want to buy into a community where you have those kinds of issues. Absolutely, fha and conventional loans have loan limits. Are there any different dollar amount loan limitations between something like a condo and town home versus a detached single family home?

Sarah: 13:02

The baseline for conforming loan limits is the same. However, if you're going to go out and buy a duplex or a fourplex, your price can go up higher And you can also use projected rental income to help you qualify.

Phil: 13:22

That makes sense If you're going to be able to buy a duplex type condo or town home. If you're just buying a single unit and you're comparing that to a single family detached, you're going to still have the same conforming loan limits, correct. So I wanted to talk a little bit about FHA versus conventional, and I know that it's easier to get conventional financing for condos, but if it's an FHA approved project, it's pretty straightforward. I wanted to just talk about pros and cons of conventional versus FHA. Let's start with interest rates, which typically are going to have better interest rates, fha or conventional.

Sarah: 14:00

Typically you're going to have a better interest rate going with an FHA loan as well as lower mortgage insurance, especially since the mortgage insurance recently lowered. So your monthly payment overall is going to be less with an FHA loan than a conventional, unless you're putting more than 20% down.

Phil: 14:21

And let's talk about down payment. So the down payment requirements on an FHA versus a conventional?

Sarah: 14:27

On an FHA, the minimum down is 3.5%, and on a conventional, the minimum down is 5%.

Phil: 14:36

And now let's talk about qualification, because this is also an area that makes FHA very advantageous. What are the credit score requirements between the two?

Sarah: 14:46

So with FHA you can go down to a 580 E-FICO score, but with conventional it starts at 620.

Phil: 14:53

And if you're at a 580, it's going to be more difficult to get that FHA loan into the condo versus if you already have 620. So if you're already at that 620, you definitely want to start looking at conventional financing. However, their debt to income percentages are different. Did you want to just quickly go over that?

Sarah: 15:13

So when you have a 620 FHA, go going conventional. You're going to have the highest conventional rate because that's the bottom of it. You're going to have the highest rates. You're going to need to have a lower debt to income ratio. So try and keep that under 45%. Versus with an FHA you can have a higher debt to income ratio going up to 56.5%.

Phil: 15:44

If you're at that 620 score which again is the bottom starting point with conventional, but it's more like the midpoint for FHA you're going to have more buying power with FHA because you'll typically have a bit lower interest rate. Your mortgage insurance at that point, if you're doing a lower down payment, is usually going to be less and your percentages are going to be a bit higher. If you're over that 700 credit score, though, things start changing and conventional can be really advantageous for you. So I hope that helps you guys kind of understand a few of the different finance parts. Now we are looking at some in our area. Here I see condos running anywhere from 300,000 to 400,000 into the millions. I thought maybe it'd be helpful to talk about jumbo loans or other kind of relevant financing options, for I'll call them the luxury condos. Is there anything that people should be aware of for those?

Sarah: 16:40

Well, for FHA and luxury condos in townhomes, there aren't really any other qualifications other than you need to have a higher credit score, and that credit score is starting at 720 right now.

Phil: 16:55

So there you have it. If you want to buy that multi-million dollar luxury condo, if you're looking at that jumbo loan which is going to be over your conforming limit, there really is just that minimum credit requirement. Of course, you have to hit the other requirements, like income, and you're going to have to have a down payment. That's going to be a percentage of that overall dollar amount, which can be quite big.

Sarah: 17:18

For jumbos you definitely need to have a much higher down payment than you would for a conventional or FHA.

Phil: 17:26

Now let's jump back to any kind of first time home buyer programs. Are there typically like unique or special financing options or programs for first time home buyers of condos and townhomes? I mean FHA loan often is called a first time home buyer loan. It's not technically. Are there programs? Did they all work with condos, just like they would work with a single family home?

Sarah: 17:49

Absolutely All down payment assistance programs will still work for condos and townhomes. I'd like to also add that townhomes do not have the same conditions and the same financing requirements that a condo does. Townhomes are much easier to navigate versus a condo.

Phil: 18:13

It's sometimes hard to tell the difference between a condo or a townhome. It's the way that the association is set up. This is where it's again really important to make sure you're working with your real estate agent to ensure that the type of unit that you're looking for is considered a condo or a townhome, because what may look like a condo is actually considered a townhome, making financing a lot easier. On the flip side, what you may think is a townhome is actually considered a condo, and it does make it a bit harder to navigate the financing on it. Any last things you want to mention about condos And I'd love for you to maybe expand on why it's such a good choice for a first-time home buyer.

Sarah: 18:57

It is such a great choice for a first-time home buyer right now just because you get more for your money. Typically, there's more amenities for a townhome or a condo than there would be for a single family home. Going as a renter renting from an apartment and going into a condo is a really great way to start building your own equity in your own home And being able to afford living in the area that you would want to live in, because condos are typically less expensive than a single family residence. So you'll be able to live in the same area that you want And be able to own your own home, living in a condo.

Phil: 19:51

One of the things that's great about condos is they tend to be in areas that are, like in a downtown city, very hard to find a single family home there, so you're kind of in the center there. It's really that great in-between step between apartment renting and purchasing your own single family home. There's a lot less maintenance involved. In fact, a lot of the exterior maintenance is already taken care of. And then, yeah, the amenities. Typically they're gonna have great amenities and it could be anything from just walking trails and parks. Sometimes there's gyms and pools, similar to what you would feel like in an apartment community, and it also has that same kind of community feel. The thing is, the biggest difference between an apartment and a condo is that you have people that are there permanently, they've bought and they're staying there, so you don't have as much movement And so you really do get that better sense of community. So, yes, you might have a shared wall or two, but they're oftentimes also just built to a higher standard than your run of the mill apartment building.

Phil: 20:53

Well, thank you guys for listening. I hope this helped give you guys an understanding of some of the financing fine points for condos and townhomes and how that differs, maybe from a detached single family home. But please head over to FTHBProscom. We've got all of our podcast episodes there, articles, newsletters, resources, our Facebook group as well. Let us know any questions you guys have. Thank you for your support and happy home buying. We'll see you next time.