Mortgage Q&A: “Are mortgage rates higher for condos?”
If you’re in the market for a new condo or a townhouse (as opposed to a house), you’re probably looking to save some money on your mortgage payment each month.
After all, condos tend to be a lot cheaper than homes in similar areas because you get limited space and forgo things like a nice green yard to play in.
Condos May Have Hidden Costs
- If you are unable to put down 25% on a condo purchase or refinance
- You will get hit with a pricing adjustment in most cases
- Which will either increase your interest rate
- Or your closing costs
But condos typically come with higher mortgage rates and HOA dues, which should be factored into your side-by-side analysis.
In some areas, HOA fees can be more expensive than monthly mortgage payments, totaling $500 or more each month. So definitely include them when determining affordability.
Additionally, many mortgage lenders charge a 0.75% mortgage rate pricing adjustment for a condo once the loan-to-value ratio exceeds 75 percent. And let’s face it, most people are taking out loans with very little down.
For example, Fannie Mae (and Freddie Mac) charges a loan-level price adjustment (LLPA) for condos, as seen in the screenshot above. This will be passed on to you, the consumer, in the form of a higher rate or higher closing costs.
Put simply, if you can’t put down 25 percent or more on your condo, expect a slightly higher mortgage rate or a higher-cost loan.
Note that the pricing adjustment doesn’t mean your mortgage rate will/should be .75% higher, it just means the bank or mortgage broker will make less commission, and thus will charge a higher rate or cost accordingly.
So expect a mortgage rate maybe .125% or .25% higher if it’s a condo, and perhaps even more if it’s a high-rise condo.
Why Are Mortgage Rates Higher on Condos?
- Condominiums are a form of shared ownership
- One bad apple can affect the entire building
- As such they are riskier than single-family homes
- More restrictions mean less competition, which could equate to higher rates
Well, condos are part of a larger complex, unlike a single-family home.
And each unit affects the whole project, so if several owners are unable to make payments (or if they’re vacant because of things like foreclosure or failure to sell), the other units will lose value.
Additionally, the HOA won’t get all the dues it expects, which puts the entire building at risk when it comes to things like maintenance and upkeep. This can create a serious domino effect.
Another thing to consider is the share of investment properties within the complex – more investors means more risk.
Finally, not all types of mortgage lenders offers condo financing, so less competition means higher rates.
FHA Loans on Condos
- It can be tough to get FHA financing on a condo
- Only FHA-approved condos are eligible
- And many condos nationwide are not approved
- Thanks to strict rules and requirements like investor concentration, environmental review, FHA concentration, and more
As far as FHA loans go, there generally isn’t a pricing adjustment for condos, but you may find that fewer condominium complexes are approved for FHA financing, meaning it might not be an option at all.
The FHA recently enacted a tough set of standards for condos, including strict zoning rules and policies where a certain number of units must be owner-occupied, sold before endorsement, and current on HOA payments.
So you may see things like, “FHA-approved condos for sale,” because it’s a great marketing angle for the ones that do allow it. And many prospective condo buyers probably want to put as little down as possible, which is where the FHA loan and its 3.5% down payment comes in.
Just keep in mind that when it comes time to sell your precious condo, it’ll be more difficult to find a buyer as well if financing is limited. In short, you’re reducing the pool of eligible buyers, which you never want to do when selling anything.
This doesn’t mean you need to go out and buy a house, because that may open another can of worms, but it’s something to think about when seeking financing.