Whether you’re downsizing from a larger home or buying your first property, a condo is a great investment. However, before you start your condo-buying journey, you should be aware that the mortgage process can be a little different to the one for buying a regular house.
Being aware of these differences means you can plan for them, which can save some possible hassles further down the road.
Because condo properties are operated by a third-party association, lenders need to consider the condo association’s financial stability when granting mortgages to homeowners. How the property is managed can be a factor into the overall value of each unit. So while it’s something you can’t really control directly, it is something you can use to make an informed decision.
Do some research on the management company to get a sense of what sort of experience they have. If it’s a company that already operates many other well-reviewed and successful condo buildings, that’s a good sign it’s a well-established association with a solid financial base.
Now, If the company is managing their first building this isn’t necessarily a bad thing, but it’s something to be aware of as this could make the mortgage process a little less predictable.
The status of the property’s occupancy rate also plays a role in how lenders assess risk on a condo purchase. If the property has a higher vacancy rate, there are likely not enough owners contributing condo fees to the management fund. Therefore, the condo building may be seen as being a little more of a risk, so keep this in mind when making your decision.
Because there are a few more unpredictable factors when it comes to deciding the value of a condo, this can sometimes lead to a slightly different interest rate when compared to a single family house. On average, condos will have an interest rate that’s roughly ⅛-¼ of a percent higher than that of a house. However, there is a way to mitigate this by looking at the occupancy of a particular building.
As we mentioned above, lenders consider condos with a lot of empty suites to be riskier - generally, they’ll want the building to be around 80 - 90% sold. With a new condo building, this number is a little lower. Lenders will also look at who owns the suites - if one person owns more than 10% of the building this is also seen as risky, as they can have a big impact if they decide to sell up and move on.
By finding a building that fits these criteria, you can reduce a lot of the potential risk for the lender and be more likely to get a better deal. Of course, there’s a trade-off… In a building that’s 90% occupied, you may not necessarily find your first-choice condo.
Your credit score will affect your ability to qualify for a competitive mortgage rate. Fortunately, in this regard the required credit score for a condo is the same as for a house - ideally, you’ll want to have a credit score of 700 or higher to attract the best borrowing rates, although you can get a mortgage with a score of 640 or more.
This is something you can influence directly, by making sure you have no outstanding debts, paying your bills on time and through a few other small adjustments that we’ve outlined for you here.
To obtain the best available condo mortgage rates, you’ll want to aim for a down payment of 20% of the purchase price. This will waive the mortgage insurance fee that is applicable on the loan, which happens when you have less than 20%.
Of course, 20% may be difficult to attain for some buyers. Your down payment can be as little as 5%, however, you may expect to find lenders offering you less attractive borrowing rates and mortgage terms. Speaking to a mortgage advisor before your purchase will provide you with the valuable information you need to make an informed decision on your purchase.
One attractive feature condos offer is a lower purchase price than single-family homes, yielding more affordable monthly payments. However, you still need to plan for monthly association fees which contribute to the fund that manages repairs and upkeep for your overall property, so keep this in mind when budgeting for your home.
These fees vary from one property to another, so you’ll want to gather this information while searching for your ideal condo. Be sure to choose a condo with fees you’ll be able to afford.
You should also be wary of fees that seem too low, especially when compared to similar properties. This could be a sign that the association’s fund isn’t sustainable, which will usually spell trouble further down the road.
If your condo is still under construction and will be completed in two years or less, you may qualify for a rate hold for the duration of the build. This means lenders will guarantee the rate you qualify at today will be applicable when your condo is ready for occupancy.
Not all lenders grant this privilege, so make sure to discuss if this is an option with your lender before making an offer to purchase.
You may be committed to the financial institution you use for other products such as your bank accounts, auto loan, or credit cards. However, you don’t need to stick to that institution to obtain your mortgage!
There’s plenty of competition out there for mortgage lenders, so it’s best to shop around for the best rates and mortgage terms available. And don’t simply speak to major banks; explore mortgage brokers as well. They have access to far more products and services than traditional banks and many times, can offer you better options.
Lenders are competing for your business, so before you sign a purchase agreement, invest some time in shopping for the best mortgage to suit your needs.
Even though obtaining a condo mortgage can be a little different compared to that of a single-family home, with the right information at hand you’ll be able to make the right decision on the best mortgage available. Take your time to consider all options and be sure to read all contracts and agreements thoroughly before signing.