How Much Do You Need to Buy a Condo?

Buying a condo requires careful consideration of upfront and ongoing financial commitments. Prospective buyers must understand these costs to assess the total financial outlay of ownership. This includes immediate cash outlays at purchase, recurring monthly expenses, and meeting specific lender requirements for financing.

Initial Cash for Purchase

Purchasing a condo requires several immediate, one-time cash outlays. These initial expenses are distinct from the loan amount and directly impact the cash needed at closing.

Down Payment

The down payment is a portion of the condo’s purchase price paid upfront. This amount influences the mortgage loan size and monthly payments. Conventional loans typically require 3% to 20% or more, with 20% often avoiding private mortgage insurance (PMI). Federal Housing Administration (FHA) loans may allow down payments as low as 3.5% for borrowers with a credit score of 580 or higher, though 10% might be required for scores between 500 and 579. The specific percentage depends on the loan type, lender criteria, and condo price.

Closing Costs

Closing costs are additional fees paid at the conclusion of the real estate transaction, typically ranging from 2% to 5% of the loan amount.

• Loan origination fees: Charged by the lender for processing the mortgage.
• Appraisal fees: Cover the cost of valuing the property.
• Title insurance: Protects against future claims on the property’s title, typically required for both lender and owner.
• Attorney fees: May apply in certain jurisdictions for legal representation.
• Escrow fees: Cover services of an impartial third party holding funds and documents.
• Recording fees: Paid to the local government to register the new deed and mortgage.
• Prepaid expenses: Often collected at closing, such as a portion of annual property taxes and homeowner’s insurance premiums for the first year, plus interest accrued between closing and the first mortgage payment.

Recurring Monthly Expenses

Beyond initial purchase costs, condo ownership involves several ongoing monthly expenses. These are distinct from mortgage principal and interest payments and are crucial for budgeting.

Homeowners Association (HOA) Fees

Homeowners Association (HOA) fees are monthly dues paid to the condo association, which manages and maintains shared areas and amenities. These fees typically cover maintenance and repairs of common areas like lobbies, hallways, landscaping, and recreational facilities. They often contribute to the building’s master insurance policy, covering the structure’s exterior and common elements.

Some HOA fees may also include utilities like water, sewer, or trash removal. The amount varies based on the condo’s location, age, amenities, and the association’s financial health. Prospective buyers should review the HOA’s financial documents to understand coverage and assess stability.

Property Taxes

Property taxes are another recurring expense, levied by local governments based on the assessed value of the individual condo unit and the local tax rate. Often collected monthly as part of a mortgage escrow payment, property taxes are a separate and continuous obligation of ownership. Condo owners pay taxes on their individual units and typically contribute to taxes for shared common areas through their unit’s assessment.

Condo Insurance (HO-6 Policy)

Condo insurance, specifically an HO-6 policy, is a recurring expense for unit owners, distinct from the master insurance policy carried by the HOA. An HO-6 policy covers the interior of the unit, known as “walls-in” coverage, including fixtures, improvements, and personal belongings. It also provides personal liability coverage for incidents within the unit and may offer loss of use coverage if the condo becomes uninhabitable. The HOA’s master policy typically covers the building’s exterior and common areas, making the individual HO-6 policy important for protecting the owner’s unit and possessions.

Utilities

Utilities, such as electricity, natural gas, internet, and cable television, are additional monthly costs. While some basic utilities may be included in HOA fees, many are the individual owner’s responsibility. The specific utilities an owner pays for depend on HOA fee inclusions and the unit’s energy consumption.

Qualifying for a Condo Loan

Securing a condo loan requires meeting specific financial requirements and demonstrating a sound financial profile. These criteria help lenders assess a borrower’s ability to repay the mortgage.

Credit Score

A strong credit score is a primary factor lenders evaluate, reflecting a borrower’s history of managing debt responsibly. Most conventional mortgages generally require a minimum credit score of 620 for approval. Higher scores, typically 700 or above, often lead to more favorable interest rates and loan terms. Certain loan programs, such as FHA loans, may accommodate lower credit scores, with some allowing scores as low as 500 if a larger down payment is made.

Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio is another important metric, calculated by dividing a borrower’s total monthly debt payments by their gross monthly income. Lenders use this ratio to determine a borrower’s capacity to handle additional debt. While an ideal DTI ratio is often 36% or below, many lenders may approve loans with higher ratios, sometimes up to 43% to 45% for conventional loans, or even up to 50% for FHA loans with compensating factors. A lower DTI ratio generally indicates less financial risk and can result in better loan terms.

Income Stability and Employment History

Lenders assess income stability and employment history to ensure a consistent ability to repay the loan. They typically look for a verifiable history of stable income over at least two years, ideally with the same employer or within the same field. This demonstrates financial reliability. Required documentation often includes recent pay stubs and tax returns. Frequent job changes, especially outside the same field or without increased income, may require additional explanation.

Cash Reserves

Cash reserves are additional liquid funds lenders may require borrowers to have available after closing. These reserves, often equivalent to two to six months of mortgage payments, provide a financial cushion for unexpected circumstances, assuring lenders of continued payments. These funds are separate from the down payment and closing costs and can include money in checking or savings accounts or other easily accessible liquid assets.