Are Mortgage Rates the Same for a Condo As a House?

Whether you're shopping for your first property or looking to downsize from a house, buying a condo can be more affordable and offer flexibility, amenities and convenience you usually don't get from a single-family house. However, since these properties have higher risks than regular houses, you'll find that condo mortgage rates tend to be a bit more than house mortgage rates when you're seeking a conventional loan. The good news is that you may be able to avoid the impact if you pursue a Federal Housing Administration loan, make a large down payment or pay an upfront fee for a conventional loan.

Whether you purchase a house or a condo, your interest rate depends on factors such as risk and current market conditions. In terms of risk, lenders consider your credit score and financial profile as well as the risk level of the property. But when you purchase a condo rather than a single-family house, there is a higher level of risk since you're living in a structure shared with other tenants. This means that your property can lose value more quickly if other condo owners have their homes foreclosed on or if the homeowner association doesn't maintain the building and grounds properly.

Along with placing additional restrictions on mortgages used to purchase condos, lenders often compensate for the higher risk in the form of charging a slightly higher interest rate for conventional condo mortgages, especially when a buyer makes a down payment of less than 25 percent. This usually is due to an upfront fee that Fannie Mae or Freddie Mac makes lenders pay for financing condos when a low down payment is involved.

According to The Truth About Mortgage, your mortgage interest rate for a conventional loan to buy a condo may be between .125 percent and .25 percent more than it would be for buying a home. Particularly risky properties such as very high buildings can come with an even higher rate. If you make a substantial down payment of 25 percent or more, you may be able to avoid paying higher condominium mortgage rates. Your lender may also allow you to pay an upfront fee of .75 percent or so instead of having a higher interest rate.

If you're using an FHA loan rather than a conventional one, you likely won't have to pay higher interest due to the building type alone. Instead, you'll likely find that fewer condos are approved for the loan program, making your housing hunt harder.

To compare house and condo mortgage rates, consider that you're purchasing a property that costs $150,000, that you have a 720 credit score, that you're planning to put 5 percent down ($7,500) and use a 30-year conventional loan. As of September 2019, using the same lender and NerdWallet's mortgage rate calculator, your condo mortgage rate would be 4 percent compared to a house mortgage rate of 3.625 percent. This small difference in rates can mean a $728 monthly mortgage payment for a house versus $759 for a condo.

On the other hand, using the same $150,000 purchase price, 5 percent down payment and credit information, your interest rate for a specific lender might be 4.5 percent for a 30-year FHA loan, whether you buy a house or condo. This would mean a monthly mortgage payment of $830 for either housing type.

In addition to a higher interest rate, there are other factors to consider when looking for condo financing.

• HOA fees: On top of your mortgage principal, taxes and insurances, you'll usually have to pay an HOA fee that can run hundreds of dollars. Since you'll need to budget this when figuring your monthly housing costs, it's a good idea to consult a condo mortgage payment calculator to get an idea of how much you can expect to pay. Your lender will also consider HOA fees when calculating your debt-to-income ratio. This usually reduces the maximum housing price you can afford.
• Lender restrictions: Depending on your loan program, you'll find that factors such as the percentage of owner-occupied units, the number of units in the building, the legal standing of the HOA and the percentage of vacant units will determine whether your lender will finance the condo. Requirements for FHA loans are stricter than conventional loans, and you may find few condos eligible for this special loan program.
  
• Down payment requirements: While conventional loan programs allow down payments as low as 3 percent, your lender may require a higher down payment of 5 percent or more for a condo. For an FHA loan, though, your down payment for any property would vary from 3.5 percent to 10 percent, depending on your credit score.