What’s the difference between the financing for each?
You can’t get a mortgage without a property. I am going to discuss the mortgage financing for two different types of property under residential mortgage financing. 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 condo or a multi-family dwelling. 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, though will add some more details for clarity. Townhomes, row houses, mobile homes on leased land; on these types of properties, some but not all are homes situated on leased land fit into the condo category. The common thread between them is you only own the building as 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 manages those rights. A single-detached home is when you own all the 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 and 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 a number of different components. Those could include hallways, elevators, parking lot(s), sidewalks, etc. One of the main purposes of the monthly condo fee is to maintain and repair the common property. This includes lawn maintenance, snow removal, cleaning, garbage removal and general building maintenance. In addition to the common property, there are shared utilities in some buildings and 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 an offer to purchase, if applicable, depending on the lender you go through, you may be asked to provide the most recent financial statements and condo budget. The seller of the unit should also be providing you with other documents that will determine the health and sustainability of the condo complex as well as the competency of the condo board who manages the complex. The meeting minutes for the last 12 months will disclose any upcoming costs or special assessments as well as the goings on in and around the complex. 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 is 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, and building maintenance.
When financing a condo, the condo fees are to be factored into the 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. 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 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. 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.