Required Down Payment for a Condo Mortgage
Buying a condo is similar to buying a house. Different mortgages are available that come with different interest rates and down payment options. The more down payment you pay, the more money you will save over the life of your loan because your loan amount, and thus your interest payments, will be less. If you have excellent credit, you might be able to buy a condo with zero down payment, or a smaller down payment than someone with worse credit, though it is still in your best interest to pay as much as possible in down payment.
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FHA Loan
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If you do not have much saved for a down payment, you can apply for an FHA loan to buy a condo. An FHA loan is a loan that is insured by the Federal Housing Administration (FHA). According to the "Chicago Tribune," FHA loans only require 3.5 percent of the condo's cost as your down payment. FHA loans are also better for people with lower credit scores, as you are more likely to get approved for an FHA loan than for a conventional loan, according to LendingTree. You must be a U.S. citizen with a Social Security number and be older than the legal age to buy a condo in your state to qualify.
Conventional Loans
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Conventional loans through banks or other lenders often require a higher down payment. According to Loans 101, most conventional loans require a down payment of between 5 and 20 percent of the cost of the condo. In some places, you might need even more than that. If you do not have enough saved for a down payment, start saving now. As you save, you can start looking at the prices of condos in your area to get a feel for how much you need for a down payment. Shoot for 20 percent if you can, but speak to a real estate agent to help you get an understanding for the current market and how much you will need based on your credit history, market trends and your debt and income information.
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PMI
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Private mortgage insurance, or PMI, is often required on mortgage loans with less than 20 percent paid as a down payment. The PMI protects lenders by insuring the loan balance of over 80 percent of the total loan. For example, if your condo costs $200,000, and you put $20,000 down, you need to borrow the rest of the amount, which is 90 percent of the condo's cost, or $180,000. Since you did not have 20 percent, the PMI will insure the remaining $20,000. PMI costs are added into your monthly mortgage payments; they make your mortgage payments more expensive but allow you to qualify with less than 20 percent. PMI does not apply to FHA loans; the government insures FHA loans so PMI is unnecessary.
Other Considerations
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There are other considerations and fees associated with buying a condo that you must understand. First, if you have a poor credit score, you probably will not get approved for a mortgage loan. According to LendingTree, you need at least a 620, though you are better off with a credit score of 720 or higher. You can check your credit report for free at the Annual Credit Report website (see Resources).
Also, you need to consider the closing costs you must pay when buying a condo. You need to pay closing costs in addition to your down payment, and these include a variety of costs, such as title insurance fees, appraisal fees and processing fees. Your real estate agent can give you more details, but closing costs often cost a few thousand dollars.
Lastly, consider condo homeowner's association (HOA) and maintenance fees. These fees need to be paid monthly on top of your monthly mortgage payment and can cost hundreds of dollars each month, so ensure you can afford the payments before you agree to the mortgage terms.
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References
- "The Chicago Tribune"; Mortgage Loan Now Requires Higher Down Payment, Credit Score; Ilyce R. Glink
- LendingTree: FHA Loan Eligibility
- Loans 101: Conventional Loan Requirements
- Federal Reserve Bank of San Francisco: Private Mortgage Insurance (PMI)
- LendingTree: Credit Score Needed for a Mortgage
- ThinkGlink; Calculating Buyer Closing Costs; Ilyce R. Glink; July 2005
- Photo Credit Luxury Condo Marina image by Wimbledon from Fotolia.com
