What’s the difference between the financing for each?
You can’t get a mortgage without a property. For residential mortgage financing, we are going to discuss the mortgage financing for 2 different types of property. A single detached home is a solitary freestanding building, also known as a single-family dwelling; it is usually occupied by 1 family, but could be more. The 2nd type is a condominium, also known as a condos, or multi-family dwellings. The distinguishing factor between the two is a condo features monthly condo fees and a single-detached home does not. Obtaining a mortgage on either property type varies from each other and below I will highlight what differences you can expect when trying to obtain financing.
I very broadly categorized all properties into the 2 above groups, but let me add some more details for clarity sake. Townhomes, some but not all, and mobile homes on leased land fit into the condo category. The common thread between them being the fact that you only own the unit, the land underneath the building is considered common property and even though you have a legal right to it, the condo board that manages the complex determines those rights. Versus, it is considered a single-detached home if you own all the above surface rights to the land underneath the structure. Duplexes, mobile homes on owned land, and modular or ready-to-move homes are considered single-family dwellings.
When you buy a condo, you own a unit or suite in the complex, all other areas are considered common or shared property. The condo fees that come with owning in a multi-family dwelling serve a few purposes; therefore they consist of different components. Since you technically own a unit in a shared complex, there are going to be common or shared property. That could include hallways, elevators, parking lot(s), sidewalks, etc. One of the main purposes of the monthly condo fees is to maintain & repair the common property. This includes lawn maintenance, snow removal, cleaning, garbage removal, general building maintenance, etc. On top of the common property, there are shared utilities in some buildings; a portion of your condo fees could be allotted to cover those. What is included in your condo fees vary per complex, so be sure you clearly understand what you’re paying for on a monthly basis. How you can determine this is by reviewing your condo documents.
When it comes to qualifying for a mortgage on a condo, the downpayment and income documents requested are the same as when buying a single-detached home. The notable difference has to do with the property documents you will be asked to provide. In addition to a Purchase Agreement, if applicable, you will be asked to provide the reserve fund study and the most recent annual meeting minutes. The monthly condo fees collected go into the reserve fund and are used towards the repair and maintenance of the complex, among other things. The annual general meeting minutes highlight any upcoming costs, or special assessments, as well as the goings on in and around the complex. The documents are requested as they are used to determine the health and sustainability of the condo complex, as well as the competency of the condo board managing the place. The lender wants to ensure they are financing a property that is a good investment. You could be asked for your condo documents at the time of your mortgage application, or at the lawyer’s office just prior to funding.
Another notable condo document are the Condo Bylaws. While the lender may not request them, you should be sure to review them as they detail condo policies on pets, parking, laundry, building maintenance, etc.
When financing a condo, the condo fees are to be factored into your qualifying ratios. To get technical, 50% of the monthly condo fees are included, in addition to the mortgage payment, property taxes and heat, to determine the maximum mortgage amount you qualify for. To highlight the difference, the exact same borrower who took a 5-year fixed term with a 25-year amortization can qualify for both of the below mortgages;
– Condo with $300/month condo fees = max mortgage amount of $131,000
– House with no condo fees = max mortgage amount of $193,000
As you can see, condo fees can reduce your qualifying ability so take that into consideration if you’re shopping for property and are not sure of a house versus a condo.
If you’re thinking of getting a mortgage for a condo, talk to your mortgage professional about any other differences you may encounter along the road to financing. If you take away one thing from this article, I can’t emphasize enough how important it is to understand your condo documents and what you’re about to buy into. One to inquire specifically about is the minimum equity or downpayment amount that is required as some lenders require a larger amount if you’re applying for a mortgage on a unit in a multi-family dwelling. If you have any questions or are looking for guidance, don’t hesitate to talk to a realtor, lawyer or other real estate professional that has experience with condominiums.