How to buy a condo

Do you want to own a home but aren’t keen on the idea of mowing the lawn or repairing the damaged siding? Or maybe you just want a smaller living space? If this is the case, buying a condo or town home might be a better option for you than purchasing a single-family home.

Home loans are different for a condo than with a house. It's also important to understand the difference between co-ops and condos, pet policies, monthly fees and building amenities.

Buying a condo vs. buying a house

There are many reasons you might choose to buy a condo instead of a house. It's a convenient option if you don’t want to do landscaping and exterior maintenance, and a condo can come with perks like on-site security, a door attendant and other hotel-like amenities. Despite the many conveniences, condo owners are generally still responsible for maintenance inside the walls of their unit.

There are several differences between buying a house and a getting a condo. For one, when you buy a single-family home, you own the property the house sits on as well as the structure. With a condo, you only own what's inside your unit's walls. Even then, there are often restrictions and approvals you need before remodeling inside the unit. With a house, there are fewer restrictions on renovations.

Another difference is homeowners insurance. Condo insurance is less expensive than homeowners insurance because the insurance only covers the inside of the unit — not the land and the entire structure.

Mortgages also differ for houses and condos. Loans for a condo can be more expensive, with higher down payments and interest rates. This is due to more risks for the lender, many of which are outside the borrower’s control — like the financial health of the overall condo association.

Overall, it's both a personal and a financial decision whether to buy a condo or house. It depends on your lifestyle, financial status and the area you live in.

How to buy a condo

Buying a condo has several steps in common with buying a house, but there are some differences. Here are the steps involved in buying a condo, from finding the unit you love through closing on it.

1. Get a loan preapproval

Before starting your search, you can get a preapproval for a loan. This will help you decide your budget and the type of mortgage you might qualify for. A preapproval is not a final approval for a mortgage, but it can give you an idea of what you can spend. The lender will ask for documents like proof of income and employment, tax information, bank statements and your estimated expenses and debts.

2. Search for the right condo

Now you need to find a condo you love. Making a list of your must-haves can help as you look at different units. Work with a real estate agent to find properties that meet your criteria. Some items to consider include:

• Location: Do you want to be close to your workplace or public transportation? Is there a certain school district you prefer?
• Price: It's helpful to get a preapproval from a lender so you know what loan amount you qualify for. You should also look at your budget to make sure you take into account utilities, insurance, homeowners association fees and other expenses.
• Living space: How many bedrooms and bathrooms do you want? Is there a specific layout you like?
• Building amenities: Is it important to have on-site facilities like a gym or pool?

3. Meet the co-op board if choosing a unit in a housing cooperative

Some people confuse condo and cooperative housing (also known as a co-op). With a co-op you buy a share of the building and have a lease to live in a specific unit. The co-op has a board made up of residents who make decisions about managing the property and approve buyers before they can purchase a share in the building.

If you purchase a condo, it's not as common to need approval from the board, because you own the actual unit. There might be a meeting or application with the HOA, but there are usually not as many rules as with a co-op.

Either way, a meeting with the board isn't as scary as it sounds and usually just includes basic questions. The only exception is if you're moving to a very prestigious building in a metropolitan area, which might require a more in-depth screening.

4. Meet the neighbors

Buying a condo is a large purchase, and it can be helpful to meet other people who live in the building to see if it's a good fit for your lifestyle. For instance, if you're a young, single professional, you might prefer a building without lots of families or older adults. Neighbors can also give you insight into things like the efficiency of building management and the condo community.

5. Decide on a loan type

If you're a first-time homebuyer and want to use an FHA loan, the condo needs to be in a building approved by the FHA. There are also conventional loans, which require a higher down payment and have more stringent credit score requirements.

6. Make an offer

When you have approval for a mortgage, you or your agent can make an official offer. The offer includes the purchase price and other conditions of the loan, like the down payment amount, earnest money and closing date. The seller might come back with a counteroffer. If all goes well, your offer will be accepted.

7. Get an inspection

Once your offer is approved, you want to make sure you aren’t buying a money pit. The inspection will look at all of the systems inside the condo unit, like plumbing, electrical and HVAC. This will let you know if there are any hidden repairs that might cost a lot once you move in.

8. Close on the condo

If the inspection goes well, your loan will move through the underwriting process, where the lender takes a closer look at your financials and whether or not they will approve you for a loan. Once you're approved, it's time to go to the closing table to sign the loan paperwork and get the keys to your new condo!

What to know before getting a mortgage for a condo

Mortgages for condos can be different from single-family home mortgages. Here are some important tips to consider before applying for a condo loan.

• Condo mortgage rates: Rates vary from lender to lender, so doing your research to find the lowest rate can pay off. You can go to the website of individual lenders or work with a broker to find rate information.

  Mortgage rates for condos are sometimes higher than for other types of properties because the lender has more factors to consider, including the overall condo association.

• Condo down payment: If you qualify for an FHA loan, your down payment can be as low as 3.5%. Conventional loans generally have down payments ranging from 10% to 20%, depending on the lender, your financials and the type of loan. As with interest rates, the down payment requirement is sometimes higher for a condo than for a house, depending on the risk assessment by the lender.
• Condo closing costs: At the closing table you will need to pay closing costs. Closing costs are different for each sale. At the closing for a condominium, you will pay the traditional closing (inspection fees, appraisal fees, origination fees and recording fees), as well as HOA transfer fees.
• Eligibility requirements: The credit score you need to be approved for a mortgage on a condo varies depending on the type of loan. The credit requirement on government-backed mortgages, like FHA loans or Veterans Affairs (VA) loans, is lower than for a conventional loan.
• Typical loan terms: The loan term for a mortgage on a condo is usually 15 or 30 years.

Questions to ask when buying a condo

Before buying a condo, there are several questions you'll want to ask the HOA or building management. Asking these questions can prevent any surprise expenses or rules once you close on your condo.

Bottom line

There are many reasons you might decide to buy a condo instead of a house. The most important thing is that you do your research and understand the pros and cons of living in a condo or co-op building and the types of financing options you have. Once you decide a condo is the right choice for you, knowing what questions to ask and the potential costs can help you avoid pitfalls and lead to a happy life in your new home.