By J.R. Conway, NMLS #147631 | CM Mortgage Services Inc.

Buying a Condo or Townhome in Chester County PA: The Financing Difference Most Buyers Miss

I have had buyers send me a listing for a townhome they love and say something like this:

“J.R., this one is $400,000. I am already approved for more than that, so we should be fine.”

Usually, yes.

But there is one question I want answered before I get too comfortable.

Is the property really a fee simple townhome, or is it legally a condominium?

They can look almost identical from the street. You might walk through both properties and never notice a difference.

From a mortgage standpoint, however, they can be very different transactions.

With a typical fee simple townhome, I am primarily qualifying you and evaluating the individual property. With a condominium, we may also need to evaluate the condominium project itself.

That means you can have excellent credit, plenty of income, enough money for your down payment, and a strong conventional preapproval, and still run into a financing problem because of something involving the condominium association.

That surprises a lot of buyers.

I am J.R. Conway, owner and vice president of CM Mortgage Services Inc., a second generation, family owned mortgage brokerage located in West Chester, Pennsylvania. I have been helping homebuyers and homeowners navigate mortgage financing for more than 20 years, with a particular focus on Chester County and the surrounding communities. I personally guide my clients from the first conversation through settlement, helping them understand their financing options, monthly payment, cash needed to close, and the local factors that can affect a home purchase. NMLS #147631.

Condo financing is one of those areas where knowing what you are buying before you write the offer can save you a lot of time and frustration.

A Townhome and a Condominium Are Not the Same Thing

This is the first thing buyers need to understand.

A townhome describes the style of the home.

A condominium describes the legal ownership structure.

You can have two attached homes that look almost identical.

One owner may own the home and the land underneath it. That property may be a fee simple townhome.

The owner of the property next door may own an individual condominium unit plus an interest in common areas controlled by a condominium association.

To the buyer, both may look like townhouses.

To the mortgage lender, they may be treated differently.

That is why I do not want to make assumptions based on the photographs in the listing.

If the property is a condominium, there can be another layer of review beyond simply approving the borrower.

With a Condo, We May Be Approving Two Things

This is the simplest way I explain it.

First, I need to approve you.

We review your income, credit, assets, debts, down payment, and complete financial picture.

Second, the condominium project may also need to meet the applicable mortgage requirements.

Fannie Mae specifically treats project eligibility risk as separate from the credit risk of the individual borrower. Depending on the applicable review, lenders may evaluate the project’s financial condition, physical condition, insurance, litigation, and other characteristics in addition to underwriting the borrower and individual unit.

That means a buyer can be completely qualified and the condominium can still create an issue.

This is one of the biggest differences between buying a conventional single family home and purchasing certain condominium units.

What Does the Lender Review?

The exact review depends on the property and the loan structure, so not every condominium goes through the exact same process.

At a buyer level, though, here are some of the things that can matter.

The Condominium Association

We may need information from the homeowners association or the management company.

Fannie Mae says project documentation can include budgets, financial statements, reserve studies, insurance documentation, legal documents, engineering information, and condominium questionnaires.

That is why you may hear your lender talk about ordering a condo questionnaire.

We are not asking these questions just to create more paperwork.

We are trying to determine whether the project meets the requirements for the mortgage we are making.

HOA Fees Affect How Much You Qualify For

This is probably the first financing issue buyers should think about because it affects the monthly payment.

Suppose I preapprove you for a home with a monthly housing expense of $3,200.

Then you find a condominium with a $450 monthly HOA fee.

That $450 does not disappear from the mortgage calculation simply because it is being paid to the association instead of the mortgage servicer.

Homeowners association dues are included as part of the monthly housing expense in conventional mortgage analysis.

So now we need to account for that additional $450 monthly obligation.

This can affect your debt to income ratio and ultimately how much home you qualify to purchase.

That does not mean a condo with a $450 fee is a bad purchase.

The association fee may cover exterior maintenance, landscaping, snow removal, common areas, amenities, or other expenses that a single family homeowner would otherwise pay separately.

My concern as the loan officer is different.

Does the complete monthly payment still fit your budget and your mortgage approval?

That is why I want the HOA amount as early as possible.

A Realistic Example

Let us say a buyer is considering two properties.

Both cost $400,000.

Property A is a fee simple townhome with no HOA fee.

Property B is a condominium with a $400 monthly association fee.

If everything else were identical, Property B creates an additional $4,800 per year in required housing expense.

That additional $400 per month needs to be considered when I calculate the buyer’s debt to income ratio.

The buyer may qualify comfortably for both properties.

Or that $400 could be the difference between qualifying and not qualifying at the same purchase price.

This is why I tell buyers that the list price is never the entire affordability story.

Property taxes matter.

Homeowners insurance matters.

Mortgage insurance can matter.

And with condominiums and some planned communities, association dues matter too.

My Chester County closing costs guide explains the other expenses buyers should consider beyond the down payment.

The Association’s Finances Can Matter

Most buyers never think about the condominium association’s budget when they walk through a unit.

The lender may have to.

Depending on the applicable project review, the association’s financial health can be part of determining whether the condominium is eligible for conventional financing.

For example, Fannie Mae’s current full review requirements generally look at the association’s reserve funding and the percentage of units that are significantly delinquent on regular assessments. Fannie Mae’s full review standard calls for at least 10 percent of budgeted assessment income to go toward replacement reserves unless an acceptable reserve study supports another approach, and it places limits on serious assessment delinquencies within the project.

I am not expecting the buyer to become an accountant and analyze the condo budget.

That is our job.

But buyers should understand why this information matters.

If an association does not have enough money set aside for future repairs, eventually somebody has to pay for those repairs.

Usually that somebody is the unit owners.

Why Special Assessments Get My Attention

A special assessment is an additional charge to the homeowners beyond the normal monthly HOA dues.

Maybe the community needs new roofs.

Maybe balconies need major work.

Maybe the siding needs to be replaced.

Maybe there is a parking structure that needs repair.

The first question is obvious.

How much will the buyer have to pay?

But from a mortgage standpoint, I also want to know why the assessment exists.

A special assessment involving routine improvements is different from one connected to major structural, safety, or habitability problems.

Freddie Mac specifically distinguishes between routine maintenance and critical repairs involving areas such as balconies, foundations, parking structures, stairwells, elevators, and electrical systems. Its current condominium guidance also requires additional scrutiny when assessments are connected to serious property conditions.

So when a buyer tells me there is a special assessment, I do not automatically say the property will not work.

I want the documents.

Let us find out what the assessment is for, how much it is, how it is being paid, and whether there is an underlying project issue we need to address.

The Master Insurance Policy Matters

This is another one buyers rarely see coming.

You will normally obtain your own insurance coverage for the individual condominium unit.

But the condominium association also carries insurance for the project.

That master policy needs to satisfy applicable lending requirements.

Fannie Mae requires lenders to verify the project’s applicable insurance coverage even when the project has otherwise received an approved status through its project review system.

So you can have a financially strong borrower and a beautiful condo, but inadequate project insurance can still create a financing issue.

That is not something most buyers would know from walking through the property on Sunday afternoon.

Pending Litigation Can Matter Too

Suppose the condominium association is involved in a lawsuit.

Does that mean nobody can get a mortgage?

Not necessarily.

The reason for the litigation matters.

A minor dispute is very different from litigation involving structural safety, habitability, construction defects, or major financial exposure.

Fannie Mae identifies certain project litigation as an eligibility concern, particularly when it relates to safety, structural soundness, habitability, or the functional use of the project. It also provides exceptions for certain minor matters.

Again, my response is not automatically no.

My response is:

Let me see what we are dealing with.

Deferred Maintenance Has Become More Important

Condominium financing has changed over the years because the agencies and lenders are paying more attention to the physical condition of the entire project.

That includes significant deferred maintenance and repairs involving major building systems.

This makes sense when you think about it.

If you own a single family home and your roof needs replacement, that is your responsibility.

In a condominium, the roof may belong to the association.

If several buildings need roofs and the association does not have the money to replace them, every unit owner potentially shares that financial problem.

That is why project condition and financial strength matter to conventional lenders. Fannie Mae describes both the condition and financial viability of a project as distinct risks that can affect mortgages secured by individual condo units.

What Happens If the Condo Does Not Meet the Requirements?

This is where buyers tend to panic.

They hear:

“The condo is not approved.”

And they think the transaction is finished.

Not necessarily.

First, I want to know exactly what the issue is.

Is information missing?

Does the management company still need to complete documentation?

Is there an insurance question?

Is there an issue with the budget?

Is there a special assessment?

Is there litigation?

Is there a property condition concern?

The reason matters.

Some problems can be resolved with additional documentation.

Others may require a different conventional review approach where permitted.

And some problems are serious enough that the property simply may not work for the financing we are trying to use.

Fannie Mae and Freddie Mac both maintain specific condominium project review standards because the project itself represents risk beyond the individual borrower.

This is where experience matters.

I do not want to tell a buyer a condominium cannot be financed until I understand exactly why the project is creating the problem.

But I also will not pretend every condo can be made to work.

Sometimes the answer really is no.

Do Not Wait Until Two Weeks Before Settlement

This is probably the most important practical advice in this entire article.

If you send me a property you are considering and I see that it is a condominium, I want to know that early.

Do not wait until the appraisal is completed.

Do not wait until you have paid for inspections.

Do not wait until everyone is planning closing.

The earlier we identify the ownership structure and start looking at the project, the more time we have to deal with questions.

This is especially important for a first time buyer who may already be nervous about the process.

There is enough happening between the accepted offer and settlement without discovering a major condominium issue at the last minute.

My Chester County Home Buyer’s Guide walks through the entire buying process from preapproval through settlement and is a good companion to this article. The guide also explains inspections, appraisals, closing costs, loan choices, and the questions buyers should be asking before they purchase.

Get Preapproved for the Payment, Not Just the Price

I say this throughout my website because it matters.

Do not tell me:

“I want to spend $425,000.”

Tell me:

“I am comfortable with a payment around this amount.”

Then we work backward.

A $425,000 single family home with one tax bill can have a very different monthly cost from a $425,000 condo with a $450 association fee.

That is why a strong mortgage preapproval should be flexible enough to evaluate the actual property once you find it.

If you are primarily using conventional financing in Chester County, the goal is not simply to get you approved.

The goal is to make sure the borrower, property, payment, and loan all work together.

Frequently Asked Questions About Condo Financing in Chester County PA

Is a townhome automatically a condominium?

No. Townhome describes the physical style of the property. A townhome can be fee simple, part of a planned community, or legally structured as a condominium. The legal ownership structure determines which mortgage requirements may apply.

Can I qualify for the mortgage but have the condo rejected?

Yes. The borrower and condominium project are separate parts of the conventional mortgage analysis. A borrower may meet the credit, income, asset, and debt requirements while the project creates an eligibility issue.

Do HOA fees count against my mortgage qualification?

Yes. Required homeowners association dues are included in the housing expense used when evaluating mortgage qualification. A higher HOA payment can therefore affect how much home you qualify to purchase.

What is a condo questionnaire?

A condo questionnaire is one method lenders can use to obtain information about a condominium project. It may address the association, project characteristics, finances, insurance, ownership, and other information needed for the lender’s project review.

Can a special assessment stop me from getting a mortgage?

It can affect the review, but a special assessment does not automatically make a project ineligible. The lender needs to understand the amount, reason for the assessment, funding, and whether it relates to significant repairs or other project concerns.

Can pending litigation prevent condo financing?

Certain litigation can create an eligibility problem, especially when it involves the safety, structural soundness, habitability, or functional use of the project. Minor litigation may be treated differently depending on the circumstances.

Does the condo association’s insurance really affect my mortgage?

Yes. In addition to the buyer’s individual insurance requirements, the condominium project must have insurance that satisfies applicable mortgage requirements.

Should I check condo financing before making an offer?

Yes. If you know the property is a condominium, tell your loan officer as early as possible. Starting the project review early gives everyone more time to obtain documents and identify issues before you spend more money on the transaction.

The Property Matters Just as Much as the Buyer

One of the biggest misconceptions about a mortgage preapproval is that once the borrower is approved, everything else is automatic.

It is not.

The house still matters.

The appraisal matters.

The title matters.

The property condition matters.

And when you purchase a condominium, the project can matter too.

That does not make condos bad purchases. Condominiums and townhomes can be excellent options for first time buyers who want a lower maintenance lifestyle, a certain location, or a purchase price that fits their budget.

I simply want you to understand what you are buying before you sign the contract.

If you see a condo or townhome you like, send me the listing.

We can look at the payment, HOA dues, ownership structure, and financing together before you get too far down the road.

J.R. Conway is the owner and vice president of CM Mortgage Services Inc., a second generation, family owned mortgage brokerage serving homebuyers and homeowners throughout Chester County and the surrounding communities. With more than 20 years of mortgage experience, J.R. personally guides his clients from the initial conversation through settlement. NMLS #147631.

To discuss your purchase or get preapproved, start your secure mortgage application or call CM Mortgage Services Inc. at 610 430 6852.

CM Mortgage Services Inc. | Company NMLS #143821

All loans subject to approval. Equal Housing Lender.