Financial Facts Condo Buyers Need to Know

Buying a condo can have several advantages over buying a house. Unlike owning a freestanding residence that occupies a plot of land, owning a condo typically involves no yardwork and allows the buyer to only pay for the condo and not the land that surrounds it.

For many people, buying a condo seems more financially feasible than buying a traditional home, but there are often some crucial financial differences between purchasing a condo and buying a home. A prospective buyer should be aware of these facts before he or she applies for a home loan.

Community Occupancy Requirements

Many lenders require a certain percentage of units in a condo complex to be “owner-occupied” before they consider issuing a loan to a prospective condo buyer. The more units that are occupied by owners instead of renters, the better the applicant’s chance of receiving financing.

Another loan condition for some lenders involves shares of ownership in the condo complex. In many cases, lenders require that no more than 10 percent of units can be owned by a single party. If an owner of multiple units decides to sell them simultaneously, it could negatively impact future condo sales by making a significant amount of condos appear vacant.

Another stipulation that some lenders have is for the majority of units in a condo complex (usually around 90 percent) to be occupied. A high percentage of occupancy indicates that the community is a popular destination for condo buyers, and has governing documents that do a good job of balancing the needs of residents with the larger needs of the complex.

Loan to Value Ratio

For many lenders, the loan to value ratio (LTV) of a condo is a determining factor for whether to approve a loan application. The loan to value ratio for a condominium is the fair market value of the unit versus how much the buyer owes the lender. For example, if a condo is worth $200,000, and the loan applicant makes a 30 percent down payment, the LTV would be $140,000.

Some lenders have tougher LTV requirements for buying a condo than they do for buying a home. This is why it is important not to extrapolate the financial terms for receiving a home loan and apply them to receiving a loan for a condominium. A condo association management company can provide valuable information about loan candidacy in terms of LTV requirements.

Carrying Insurance

Condo communities carries insurance that covers settlements that result from personal injury or property damage for which the community is held liable. However, it is important to determine whether the insurance applies to incidents that occur in common areas or incidents that occur anywhere in the community.

If the community’s insurance policy offers limited coverage or no coverage for accidents that occur in residences, it may be wise to take out an umbrella insurance policy to ensure that you are protected against legal settlements that result from unforeseen circumstances. A condo association management company can provide insurance recommendations.

Interested in Buying a Condo?

If so, it is important to consider the financial facts above, especially considering that many of them have a significant impact on home loan eligibility. If you need additional information about the financial aspects of buying and owning a condominium, RealManage is happy to help!