What are you actually buying, a townhome or a condo?

What are you buying, a condo or a town house?

Looks like a townhome, acts like a townhome – but its a condo, and that makes a big difference in mortgage financing!

People, including many Real Estate Agents, mistakenly assume a property legally platted and developed as a condominium is a town house. In the mortgage financing industry, there is a difference in both interest rates, and the time and ability to get a loan for a condo versus a town house.

Minnesota Mortgage Broker - Best Interest rates - Condo financingWhen you buy a home, there are two major aspects:

  1. The lender “credit qualifies” the buyer
  2. The lender “qualifies” the home with an appraisal.

What many people miss is that if you are buying any property with an association (townhome or condo), the lender also has to qualify the association.

A townhome, often referred to in the industry as a PUD (planned unit development) is much easier to get approved, and the interest rate the buyer receives is usually the same as a single family home.

A condo on the other hand is much different. The interest rate depends on the down payment, number of stories, and a few other factors. It is usually 1/8th (.125%) to 1/4 (.25%) HIGHER than a single family home. Furthermore, the process to approve a condo association is much more complex, takes significantly longer, and usually requires the buyer to pay $200 – $300 in additional fees to get the documents from the association the lender needs to approve the loan.

Should this scare you away from buying a condo?  Of course not.

Financing rates and options depend on your knowing … Condo or Townhouse?  Does your mortgage lender know the difference?  Does your agent?  Do they take the time and make the effort to find out?  If not, you’re working with the wrong person …

You can save a lot of headache and hassle down the line if you know the rules, and if you are working with a Realtor and
Mortgage Loan Officer who understands the differences, and can properly guide you along your way to a
successful home purchase.

Buying a Condo and need financing, beware of some extra steps

Many buyers in the Minneapolis St Paul, along with Duluth, Rochester, and throughout all of MN qualify for FHA financing. FHA is the government backed loan program that allows for just 3.5% down payment. With the changes in the mortgage industry, if you are buying a CONDO, there are extra step and rules you need to be aware of.

When buying a home, lenders approve the buyer, and approve the home. When buying a town home or condo, lenders also have to approve the Association.

Without bothering you with the details, the purpose of this post is to simply make you aware of the extra approval process, and to let you know this additional step can potentially cause a loan denial, but usually just involves a much longer loan approval process.

Everyone using FHA financing to buy a condo should check to see if the condo project is on the FHA-approved (HUD-approved) list. This is an absolute must-read for you! If you want an FHA loan, you can only buy in condo projects that are approved by HUD (the Department of Housing and Urban Development).

HUD has recently made available online a list of the condo projects that are already approved. Before I show you how to access the list, know two things:

(1) If a condo project is on the list, it must still be checked by your lender to make sure it still meets HUD’s requirements (for owner/occupancy ratios, etc.)

(2) If a condo project is not on the list, your lender needs to go through a long process to get it approved. This potentially could delay your closing, or even result in a loan denial if the condo project isn’t ultimately approved. At the least, you should check to see if the project is approved before making any offer on a condo, then ask questions as to why it is not approved.

Condo’s in unapproved projects typically are offered at below market prices because of the inability to get financing. Many of these units are only able to be bought with cash.

Here’s how you check FHA approved Condo list:

(1) Go to HUD’s website at this link: https://entp.hud.gov/idapp/html/condlook.cfm.

(2) Fill in the blanks as they pertain to your condo search, and click the ‘send’ button at the bottom of the screen.

Finally, understand with the additional burden on FHA condo financing, you need to make sure you are working with an NMLS Licensed Loan Officer who understand the additional complexities to make your purchase smooth and stress free.