Condominiums are a great option for all different demographics of buyers. From the young homebuyer that doesn’t want the responsibility of a single family home to the retiree seeking to downsize and minimize their headaches, condominiums can have a number of advantages over other property types depending on the buyers’ needs.
Condominiums are a type of common interest property, which means that you are responsible for paying Homeowners’ Association (HOA) fees, often times known as “common charges”. Common charges are contributed by all members of the condominium complex and are managed by the HOA. These fees are used for regular maintenance and upkeep of the common grounds shared by all of the residents. HOA fees are not to be confused with special assessments, however.
Special assessments take place when a property improvement must be made to any portion of the commonly shared features of the buildings, common grounds, or amenities. For example, when the roof on a condominium building must be replaced, the homeowners’ association will use money from their budget to carry out the replacement. They will then, most typically, pass this expense on to the homeowners in order to replenish the funds used for the improvement. This expense is passed on through what is known as a “special assessment” which divides the expense among the homeowners, and is often broken down into a monthly payment for a set period of time.
Why does this matter to you? This matters for several reasons. First, and foremost, you want to be sure that you know ALL of the expenses you will be incurring as a homeowner, both on closing day and potentially in the future. Second, it is important to know what these different fees are and what they cover so that expectations of responsibility are completely transparent from the beginning. In addition, your loan officer is going to need these numbers in order to ensure that the numbers work within your pre-approval. If the HOA fees are extremely high or if there is a special assessment in place, it could create issues for your pre-approval if you were already at the top of your financial limitations. It is important to make sure your Realtor is screening this things directly with your lender, to save you from running in circles and ending up heartbroken!
Because of the intricacy of condominiums and the fact that the unit you will be purchasing is reliant upon the homeowners’ association to keep the complex in good financial standing and overall physical condition, financing a condominium is not always as easy as a single family home. If you are using an FHA loan, your options for condominiums are going to be greatly limited to complexes which have been FHA approved. This is a process by which the Federal Housing Administration reviews the HOA and determines whether it meets the necessary criteria to be deemed acceptable for FHA financing.
They will look at things such as how many units are owned by owner occupants vs. investors, what the HOA annual budget is, and how much money the HOA holds in reserves. Typically, they want to see the owner occupancy ratio to be above 50% and they want to see at least 10% of the HOA’s annual budget in reserves. While these same items may be reviewed by the lender on the HOA condo questionnaire form when using conventional financing, the complexes are not required to maintain an “approved” status for conventional financing, as they are with FHA financing.
These are just a few things to keep in mind as you begin your search and you are considering the different types of properties available to you for purchase. As always, your best avenue is to speak directly with a GREAT agent that can outline all of these intricate details for you and apply them to your specific scenario.
Thomas Cody, Realtor, C-REPS