Condos vs. Townhouses: How Their Differences Effect Financing
When it comes to getting a mortgage, even the smallest details matter. Not only does the financial profile of the borrower impact the application process, but the type of home in question will also make a difference. Condominiums and townhouses have multiple, fundamental similarities, but it’s their unique traits that change the financing options available.
What is a Condominium?
Condos are usually one larger unit divided into two different living spaces. In some cases, there may be enough space for the condo to be split into more than two homes. Each individual portion has all the amenities of a traditional house (kitchen, bathrooms, living room), but some spaces may be shared, such as a driveway, backyard, gym, etc.
Condos also have at least one shared wall, if not more. Homebuyers may find more in common between an apartment and a condo rather than a house and a condo. However, condos can be owned, and often feature a variety of beneficial common areas such as dog parks, a pool, basketball courts, or a gym. The ownership will likely only apply to the interior unit, not the land it sits on.
Another thing to keep in mind is the potential for wallet straining HOA dues. As a condo owner, you may not be in charge of mowing the lawn or paying for roof repairs, but you will usually pay more in fees than if you lived in a house or an apartment. The responsibilities and extra costs that come with owning a condo will vary from place to place.
What is a Townhouse?
Similar to a condo, a townhouse will usually have at least one shared wall, but the key difference here is that townhomes are often multiple stories tall. The shared walls occur when a stretch of townhouses is stuck together, side-by-side. Different from condos, this style of living creates a more individualistic feel that minimizes shared spaces.
Some townhouse owners still have the benefits of a community pool or gym, but unlike condos, the space they own will also include a basement, personal garage, and more privacy. Because townhouse ownership consists of the land underneath it and access to the roof, buyers should beware of the additional costs that come with the upkeep of those two areas. So lower HOA fees are a plus, but the potential cost needed for repairs may be the deciding factor between a condo and a townhome.
Let’s Talk Financing
The aesthetic and comfort of your home are incredibly important, but so are your financing possibilities. Let’s break down the differences between these two similar living options.
Although condos and townhomes are stylistically similar, financing a condo can be tricky. The process of qualifying for a home loan when purchasing a townhouse is comparable to buying a single-family house. Condos, on the other hand, need to meet additional requirements before a lender approves any financing.
Loan requirements vary depending on the loan type, even if the loans offer comparable rates. (There are loans available for condos including FHA, USDA*, VA, and more.) However, the rules and regulations associated with qualifying for each type of loan can be a cause of concern for some lenders. For example, for a buyer to receive financing through an FHA loan, the condo must meet FHA requirements… which are part of a complicated, 100-page document. Now, this doesn’t mean you won’t be approved; it just means that as a borrower, you should be aware of the (sometimes) strenuous process ahead of time.
You might be wondering what it is about condos that make financing them such a risk. Simply put, when you own a townhouse or a home, you are the only owner of that entire space, including the land it sits on. Unfortunately, when you own a condo, the other tenants still pose a risk to your mortgage.
If the market were to plummet or the Homeowner’s Association doesn’t follow through with renovations and repairs, you could quickly become one of the only tenants left. This creates a financial risk for the lender. When the value of each unit goes down, so does the investment your lender made by financing your loan.
The Bottom Line
Depending on where you stand financially, you may also receive a higher interest rate or need to put down a larger down payment when trying to finance a condo. Because each financial profile is different, it’s best to speak to a Mortgage Advisor directly, rather than rule out your options ahead of time.
You don’t have to start the homebuying journey all on your own. We’re here to help. Contact a Mortgage Advisor today for more information.