Condos

Condos: What to Know Before You Buy

Condominiums can be an incredible path to homeownership, especially for first-time buyers, busy professionals, and anyone who values simplicity and community. But before you sign a contract, it's important to understand what you're really buying, how condos are financed, and where hidden challenges can pop up.

The Appeal of Condos

There are tons of reasons condos are so popular, one of the most obvious reasons are the amenities. Many condominium communities offer features that would be cost-prohibitive in a single-family home: pools, gyms, secured entrances, elevators, parking garages, rooftop decks, and even concierge services. You're essentially sharing the cost of lifestyle upgrades.

They also offer a convenient lifestyle and often less maintenance. No mowing lawns. No large repairs like replacing a roof. No shoveling snow at 6 a.m. And for buyers who travel, work long hours, or just prefer convenience, that low-maintenance model is attractive.

In addition to the amenities, lifestyle, and convenience, condos can offer a more accessible entry point into homeownership compared to detached homes. That can mean a lower purchase price, a smaller down payment requirement, and a chance to begin building equity sooner rather than later.

Understand the Inner workings

Buying a condo is different from buying a single-family home. When you purchase a condo, you own two things:

• The interior space of your unit
• A percentage of the building's common elements (shared ownership)

You do not own:

• The exterior walls
• The roof
• Hallways
• Elevators
• Structural components

Those are owned collectively by the condominium association. This is important to note because it affects your financing, insurance, and overall risk exposure.

Where Does the Monthly Condo Fee Go?

So where does that typically monthly fee that condo owners pay go? They go to things like:

• Exterior maintenance
• Landscaping
• Common area utilities
• Amenities
• Reserve funding for future repairs
• And Insurance

The key question isn't whether there are dues. It's whether they're financially healthy. Low dues can look attractive, but if reserves are underfunded, special assessments may be coming. That means unexpected out-of-pocket costs for the owners in that complex.

One of the most important piece of owner's dues is insurance. Because of the nature of what the individual owns versus what the condo association owns there are two different insurance policies associated with condos. Generally speaking, the "walls-in" policy, everything on the inside of the condo unit, and the "walls-out" policy, a master policy paid by the condo association that covers the rest of the building.

Where Else Can Issues Arise?

One of the most misunderstood things about condos is how they are financed. In the mortgage world, condos are categorized as either warrantable or non-warrantable.

A warrantable condo meets guidelines set by agencies like Fannie Mae and Freddie Mac; and in those cases, they are financed like a single-family home. The agencies evaluate the warrantability of a condo based on things like:

• Owner-occupancy ratios
• Investor concentration
• Financial reserves
• Pending litigation
• Delinquency rates on HOA dues

If a condo project does not meet those standards, it is considered non-
warrantable.

Just because a condo is considered non-warrantable does not mean that condo cannot be financed, it means it will most likely need to be financed in a non-traditional manner. In the mortgage industry we refer to this type of loan as a Non-QM loan.

What Is a Non-QM Loan?

Non-QM loans are portfolio-style products offered by private lenders. They:

• May require higher down payments
• Often carry slightly higher interest rates
• Have different underwriting standards

They can be powerful tools, but they change the financial overall equation. That's why understanding the project's status early is critical.

Do Your Due Diligence

If you are considering a condo, it's important to do your due diligence. Before writing an offer, your lender can use tool like Fannie Mae's Condo Project Manager Look-Up and FHA's Condo Approval Search Tool to find out the condo's warrantability status.

But tools alone aren't enough. You should:

• Review the condo resale package
• Examine the budget and reserve study
• Understand pending litigation
• Confirm insurance coverage
• Talk to a lender who understands condo underwriting both warrantable and non-warrantable

Condos are not inherently risky, but uninformed purchases can be. A condo can be a fantastic wealth-building vehicle and lifestyle upgrade. The key is going in educated.

Understand what you own.
Understand what you insure.
Understand how the association operates.
Understand how lenders view the project.
And that's how you turn a condo purchase into a strategic step forward, not a surprise waiting to happen.