How to buy a condo with confidence

Orange condo building

Condo prices are so depressed, you may be able to afford a home that was far beyond your means before the recession.

Luxurious properties in the heart of the city or overlooking the ocean, fairway or mountain, cost hundreds of thousands of dollars less than they did just a few years ago.

But buying the right condominum means you have to do more than choose a good location and pay the right price.

Your fortunes and living space are intimately linked with those of the other owners and the homeowners' association.

You also have to take into account homeowners’ fees, additional assessments and the overall financial health of the condominium complex.

These five smart moves can help you choose the right condo with confidence.

Smart move 1. Finance your condo with an FHA loan

You stand to get the least-costly loan if you can qualify for a mortgage guaranteed by the Federal Housing Administration.

Everything is possible, including the lowest down payment and closing costs.

FHA loans have features that help home buyers who have more debt, lower credit scores and less cash for a down payment than traditional mortgages require.

Click here to see all of the advantages to turning to an FHA loan.

But the building or complex must be approved by the FHA before it will finance a condo there, and only about 25% of condo complexes are FHA-approved.

The FHA is working on revisions to its rules that have made so many condominiums ineligible for its mortgages.

To be FHA-approved, existing complexes must have:

You can search for FHA-approved condos using the Department of Housing and Urban Development's condominium search feature.

“Even if a condo complex doesn’t have FHA approval, savvy buyers can use FHA standards to evaluate the quality, financial security and resale prospects of a condo complex,” says Sheryl Petrashek, an agent for Re/MAX Results in Apple Valley, Minn.

Smart move 2. The next-best loan is backed by Fannie Mae

If you won't need a jumbo loan — one for more than $417,000 to $625,000, depending on the city — you'll want to finance your purchase with another type of government-backed loan.

You'll want a loan that can be sold to Fannie Mae, one of the big government agencies that buy home loans from banks and mortgage companies.

That will make it easier for you to qualify for a mortgage and help you get the lowest possible interest rate.

But 51% of the units in the building or complex must be owner-occupied (as opposed to investor-owned and rented) and no more than 20% of the total square footage can be used for commercial purposes to qualify for Fannie Mae financing.

In addition, Fannie Mae requires that at least 10% of association dues be deposited in the condo association’s reserves.

If you are making a down payment of less than 20% and must have mortgage insurance, the investor ownership has to be less than 30%.

For condos in newly constructed buildings, Fannie Mae requires that more than 70% of the units must be sold or under contract as a primary or second home, and no more than 15% of condo association dues can be more than one month late.

To obtain mortgage insurance, 70% must be sold, with no more 30% owned by investors.

Smart move 3. Check for healthy financial reserves

When you own a condo, you pay homeowners’ association fees to cover maintenance and operating expenses for the entire complex.

The best way to evaluate the state of a condo association’s finances is to ask for the latest “reserve study” prepared by an independent architectural and engineering company.

These reports evaluate the condition of all jointly owned structures, estimate when major repairs will be needed and how much they’ll cost, and then assesses whether the association has enough money to do that work.

The building inspectors summarize their findings in a key number called “percent funded,” which reflects how much the condo has set aside to cover those future expenditures.

Associations that have enough to cover 70% or more of their anticipated maintenance costs are considered to be in good shape.

They rarely need to impose special assessments on owners to make up shortfalls in condo finances, according to Robert Nordlund, the CEO of Association Reserves Inc., a California company that conducts reserve studies.

But you need to be wary of buildings or developments where the percent funded has slipped below 30%.

Associations that strapped for money often defer critical maintenance and are the most likely to impose big onetime fees.

“Many condo buildings in Florida didn’t collect reserves for many years," says Janice Leis, associate broker with Prudential Fox & Roach in Philadelphia. "When hurricanes compromised the structures and insurance companies mandated upgrades, condo owners faced special assessments from $30,000 to $100,000, depending on the unit.”

Smart move 4. Look for a smooth-running organization

Review the condo board meeting minutes to see if problems are resolved quickly and effectively.

Taking care of maintenance issues is one of the board’s essential responsibilities.

Any repair should show up in the notes twice: first, when the board discusses it and decides what to do, and again when the bill is paid and the issue is resolved.

Maintenance issues reappearing month after month are a sign of an ineffective or dysfunctional board.

Talk to people who live in the building. Find out if their needs are met and issues resolved in a reasonable amount of time.

Neighbors can also provide an idea of the character of the complex.

Smart move 5. Make sure the condo meets all your expectations

You don’t have to settle for anything less than your ideal condo.

Make sure that the level of maintenance meets your standards. You might not agree with what the condo association considers well-maintained.

If the golf course is a big reason you want to buy there, play a round or two to see if it matches your game and is as well cared for as you would expect.

If you’re expecting to spend a lot of time at the condo’s pool or beach, ask whether you can spend a day or two lounging by the water. Is it a relaxing retreat for other residents or a beer-and-boom-box party kind of place?

Condos are close quarters, so issues such as blaring music, screaming kids and barking dogs can become unbearable. Spend some time in the condo itself to see how much noise comes from surrounding units.

Do the upstairs neighbors stomp around like elephants? Can you hear the baby next door crying? (Sound often travels through the plumbing chases in the walls.)

These are all nasty surprises you want to avoid, and don’t have to put up with, in this market.

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