Guide to Buying a Condo: Pros, Cons and Costs

Thanks to their affordability and amenities, condos are an appealing option for many people—from first-time homebuyers to those purchasing a vacation home. But while there are many benefits of buying a condo, there are also a few nuances that may impact your decision.

From unexpected costs to unique financing requirements, many aspects of buying a condo are quite different than buying a single-family home. Here's what you need to know before purchasing a condo.

What is a condo?

Contrary to popular belief, condos aren't always apartment-style units within a larger building or complex of buildings—they can also be townhomes or detached units.

When you buy a condo, you're purchasing a single housing unit within a community of similar units. While you own the interior of your individual unit, common areas like hallways, elevators, club rooms, pools and exterior grounds are shared with other residents and managed by an association. To cover the management and upkeep of these shared spaces, you'll typically pay regular fees to a homeowners association, or HOA.

What's the difference between a condo and a co-op?

Condos are often confused with housing cooperatives, or co-ops. While condos and co-ops have similarities, there are some distinct differences—starting with the ownership model. Rather than owning an individual unit within a community, co-op residents own shares of the company that owns the building.

Co-ops often charge higher association fees than condos, but those fees frequently cover additional expenses, such as property taxes and most utilities. Co-op dues are typically calculated based on the shares of ownership that the resident has in the building, with larger units owning more shares.

When it comes to financing the purchase of a co-op, lenders often set stricter guidelines, which may include higher down payment requirements. Also, every co-op has a board of directors that interviews prospective buyers before allowing them to purchase shares in the building. While this vetting process may help ensure your neighbors are fully invested in the success of the community, it may also make the process of buying and selling a co-op a bit more difficult.

Benefits of buying a condo

Condos have long been an appealing option for buyers located in bustling metropolitan areas or resort towns. They're also particularly attractive to buyers who are looking for more amenities, fewer home maintenance responsibilities and a sense of community.

Of course, relative affordability is one of the most significant benefits of purchasing a condo, particularly in today's housing market. According to the most recent data available from the National Association of Realtors, the median sale price of an existing condo is $365,300—nearly $50,000 less than the median sale price of an existing single-family home. In densely populated cities, the discrepancy typically widens. This makes condos particularly attractive for some buyers who are deciding between renting or buying a home.

Drawbacks of buying a condo

Although there are many benefits of buying a condo, there are also a few caveats to consider—particularly if you're choosing between buying a condo versus a house.

Slower appreciation

Condos may not appreciate as quickly as single-family homes, potentially making them a less attractive investment. In some markets, condos may also take longer to sell, and supply and demand can sometimes have a significant impact. If you live in a large community with frequent turnover, you may be competing against similar units in your building when it comes time to sell.

HOA fees

Owning a condo typically comes with the obligation to pay HOA dues that cover the upkeep of common areas and amenities. According to the 2021 American Housing Survey from the US Census Bureau, the average HOA fee in the US is $191 per month. However, many condo owners pay more because the fee may cover insurance for common areas and essential utilities like heat, water, sewer and garbage collection. Condos with unusually high HOA fees could be more difficult to sell in the future.

Higher mortgage rates

Mortgage rates are another key factor to consider. Mortgage giants Fannie Mae and Freddie Mac have a higher risk perception of condo values, which can hinge on the financial health of the condo association and the condition of common areas—two factors that are outside a condo owner's control. To hedge against that risk, some lenders charge condo buyers higher mortgage rates, extra closing fees or higher private mortgage insurance rates.

Unexpected fees

Condo associations have the power to assess one-time fees—called special assessments—to cover unforeseen expenses like major repairs due to a natural disaster, amenities that require upgrading or replacing, or general budget deficits. Condo associations with a healthy reserve fund may be less likely to charge special assessments.

Some associations may also have strict rules and policies governing noise, parking, pets, garbage and recycling disposal, renovations, and other regulations. Violations can result in fees, liens on your property, lawsuits or other consequences.

Is it harder to get a loan for a condo?

Generally speaking, the process of applying for a mortgage on a condo is similar to the process for a single-family home. You'll need to earmark money for a down payment and closing costs, have the property appraised, and pass the underwriting process before your mortgage can be approved. However, in addition to reviewing your personal finances, your lender will also review the financial health of the condo association during underwriting, which may extend the process.

How much is a down payment on a condo?

If you're buying a condo with a conventional loan, many lenders will require a minimum down payment of at least 5%—depending on your financial situation. However, to avoid having to purchase private mortgage insurance, or PMI, most lenders require a down payment of at least 20%. Generally, PMI ranges from about 0.3% to 1.15% of your loan amount, per year. Taking the time to shop for a mortgage can help you compare rates and fees across different lenders.

Can an FHA loan be used for a condo?

If you're planning on using a Federal Housing Administration, or FHA, loan to purchase a condo, you may have a smaller pool of options to choose from. To qualify for financing, the unit you purchase must be an FHA-approved condo. These are individual condos or complexes that have been vetted by the US Department of Housing and Urban Development, or HUD, and meet the agency's specific requirements. You can search for FHA-approved condominiums by location, name or status on HUD's website.

What is a non-warrantable condo?

When a condo is labeled non-warrantable, it indicates the condo unit or building does not meet financing standards set by Freddie Mac and Fannie Mae. As a result, some mortgage lenders perceive non-warrantable condo loans as higher risk. Lenders willing to finance these properties may charge higher interest rates and require larger down payments.

A condo may be considered non-warrantable if, among other issues:

• The building is new construction or unfinished.
• The developer has yet to turn over control of the condo association to the owners.
• Renters occupy a high percentage of units.
• The community allows short-term rentals.
• A single person or entity owns more than 10% of the total units.
• The developer or HOA is involved in safety or structural litigation.
• A high percentage of owners are behind on their association dues.

How to buy a condo

Follow these tips to make the process of purchasing a condo as smooth as possible.

Get your finances in order

To qualify for a mortgage, you'll need to meet certain credit score and income requirements. Most conventional loans require borrowers to have a minimum credit score of 620 and a debt-to-income, or DTI, ratio of no more than 36%. You can calculate your DTI by dividing your ongoing monthly debt payments—from housing and car loans to credit card bills and child support—by your monthly income.

Even if you think you're in good shape, it's still important to engage in financial planning before buying a condo. This may give you time to improve your credit score, reduce your debt and save for a larger down payment—all of which can help reduce your monthly payment.

Know what to expect

Before dipping your toes in the water, take time to educate yourself on the steps to buying a home. This is one of the most significant purchases you'll make in your lifetime—and often stressful. Knowing what to expect can help make the process of purchasing a condo far less overwhelming.

Hire the right professional

It's important to hire a real estate agent who has experience working with condo buyers. There are additional steps to buying a condo versus a house—such as vetting the condo association's finances—and you'll want an experienced agent who can help you navigate these steps with confidence.

Speak with your lender

Make sure your loan officer knows you're shopping for a condo, as they may have different lending requirements for condo purchases.

Factor fees into your budget

When it comes to buying a condo versus a house, searching for properties within your budget can often be a challenge because HOA fees are a key variable that can significantly impact your monthly payment. In some cases, more expensive condos with low HOA fees may align with your budget better than cheaper options with higher association fees.

Always familiarize yourself with an association's fees and see how they'll influence your total monthly payment. Other expenses to plan for include property taxes, your individual condo insurance policy and the cost of purchasing a parking spot, if applicable.

Do your due diligence

If you've found a condo you love, take the time to carefully review the condo association's finances. By law, condo associations must provide prospective buyers with documents showing the association's reserves, operating budget and other pertinent financial information. Your real estate agent can help you review these documents. Also, take the time to familiarize yourself with the condo association's rules and regulations, such as whether there are pet limitations, parking policies and noise restrictions. These terms are typically specified in a document called covenants, conditions and restrictions, or CC&Rs.

Key takeaways

• Lenders may have stricter loan requirements and charge a higher mortgage interest rate for condos than for houses.
• Be prepared to pay ongoing association fees and possibly some special assessments to cover unforeseen expenses.
• In some cases, condos may appreciate less quickly and take longer to sell than houses, potentially making them a less attractive investment over the long term.
• Before deciding to purchase a condo, you should carefully review the association's finances and its rules and regulations.