Condo or single-family home? How it can affect your mortgage

Finding the right home is challenging enough in today’s competitive housing market, so it’s helpful to know ahead of time how the type of property you choose will affect your mortgage eligibility, and ultimately, payment.

The average price of an existing home—including both houses and condos—was $350,300 in May 2021, a notable 23.6% increase over the same time last year, according to data from the National Association of Realtors. Condominiums are typically priced lower than single-family homes, making them especially friendly for first-time buyers.

Yet because condos are often favored by first-time buyers, there’s a myth that it can be easier to secure a mortgage for them. Not necessarily. Deciding the property type is a big question for many reasons, including its impact on your mortgage.

Following are four mortgage implications when considering a condo versus a detached home:

As a general property class, condos are more of a risk for lenders

In a condo, the homeowners association (HOA) manages a building’s budget to handle ongoing maintenance and repairs for shared amenities. Lenders need to protect their investments from the potential of low reserves and poor management, both of which can lead to exceptional repair and maintenance issues that may lower property value over time.

Interest rates can be higher for condos

To help offset that higher risk, government and private lending institutions alike may adjust interest rates for condos. The interest rate for a condo, for example, if you are putting 20% as a down payment, will be roughly 0.125% to 0.25% higher than for a detached home with the same down payment. There can be ways around this, like increasing closing costs or the down payment instead, so look for lenders willing to get creative with you.

Condos make for a more complex process

Your credit history may be pristine, but how is the condo association’s credit? Lenders have stringent lending guidelines around HOAs and condo building management in general. For example, the Federal Housing Authority (FHA) only considers loans when HOAs have a proven record of maintaining reserve funds to cover capital repairs for the next two years. Lenders also consider the owner-occupancy rate, favoring buildings that have a higher percentage of owner-occupied units. For FHA, a maximum of 50-65% of the units may be investor-owned/rentals to meet eligibility standards.

On a related note, the inspection process can be more complex for condos than for detached homes, given there are more common areas to assess that may also in turn affect your long-term HOA dues.

Long-term value considerations

Condos typically don’t appreciate as fast as single-family homes, and long-term HOA fees can have an outsized impact on your total cost of homeownership.

The bottom line: People get competitive mortgages for condos every day

None of the above should be construed as a warning against buying a condo. Aside from these additional mortgage considerations, a condo may well be the best choice for a range of reasons, from affordability to the convenience of sharing the burden of maintaining outdoor space and other costs.

An effective lender will certainly evaluate HOA policy and performance, potentially adding a bit more paperwork. But they’ll also work with you to structure mortgage solutions that work for you, which in the long run, matters more than a little extra footwork in the beginning. 

Check out these other home buying tips!

• Six common mortgage myths, busted
• Navigating mortgage options for first-time homebuyers
• Will a new credit card affect a mortgage application?