In the world of real estate transactions involving condos and townhouses, if it looks like a duck, talks like a duck and walks like a duck…sometimes it’s not a duck.
Frequently enough, some home buyers want to split hairs between single family residence living and the condo life. They make a slight compromise on privacy for the sake of limited maintenance. They seek a larger floorplan perhaps. There are many reasons but in the end, they seek a townhome or row house. Excitedly, the purchase agreement is executed, the inspection is scheduled and it’s often at this point, . . they find out that they just technically bought a condo.
Sorting out the difference between a townhouse/row house vs. a condo is rather simple; one just has to know what to look for. The determinative difference, from a lending perspective, lies in the legal description of the property. And it’s easy. From a mortgage lending perspective, if the property has a Lot Block legal description, it’s a townhome or row house. If it has a Common Interest Community (CIC) legal description, it’s a condo. Regardless of what a property may appear to be to the eye, when it comes to the mortgage you’ll use to buy it…it all comes down to the legal description.
Knowing this difference has great implications on mortgage financing. Here are 3 examples of potential unforeseen pitfalls:
- You Might get a Higher Rate if You Buy a Condo
With this warning, I’ll use Fannie Mae backed loans for simplicity’s sake. Unless one is putting 25% down or is taking a loan with a term equal to or shorter than 15 years, Fannie Mae actually imposes a pricing adjustment on condo purchasers. This pricing adjustment is the equivalent of ¾ of one percent of the loan amount which the consumer pays for in the form of a higher interest rate, higher loan cost or a mixture of the two.
- Fannie Mae and Freddie Mac’s Rigorous Condo Approval Process
Prior to the real estate crash of 2008, underwriting review of the health of condo associations was very lax. Let’s be real. It was pathetic. After the crash, any major real estate financing institution was examining the origins of defaulted loans and many were found in condo (CIC) properties. As a consequence many institutions, including Fannie Mae, came out with new and rigorous condo review processes. This is great for the condo buyer in that they are much better protected from unhealthy associations now that Fannie Mae is looking over their shoulder but it does add another layer of complexity to underwriting and can mean that it will take longer to bring a condo transaction to the closing table. Additionally, it comes with a cost. Often times, the condo associations themselves will charge 150-450 dollars simply to fill out the questionnaire required to process the condo approval in underwriting.
- Condo Association Approval by FHA and VA
Fannie Mae wasn’t the only one to tighten their condo association approval process after the 2008 crash. By many people’s account, FHA and VA not only tightened but went waaaay overboard. Getting an association approved with FHA has become so onerous that very few and now in active approval status. Those that are can be found here. VA approved projects are even more scarce. The VA approved projects can be found here. Too often, FHA approved or VA approved buyers get all excited about a particular property only to find out after they’re ready to act on it, that they can’t buy it.
This is not to say that condo living isn’t fantastic and full of many very meaningful benefits that can’t be found in any other type of homeownership. I can personally attest that it does. This isn’t to say the buying a townhome or row house isn’t the perfect way to find the balance between single family residence life and condo living. It most definitely is. One is not better than the other. The right one for the buyer is the right one. It’s simply very important to make sure that when you’re looking at a particular property, one knows exactly what they’re looking at and what all those implications might be.
Happy house hunting!
Charles Dailey – NMLS 79048 – Branch Manager, Loan Officer, Certified Military Housing Specialist – 612-234-7283 – firstname.lastname@example.org
The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer’s search criteria.