Wednesday, February 10, 2021 / by Anne Rose
Financing a Condo Versus Financing a Townhome
Buyers considering the options between a condo and a townhome need to understand the differences in obtaining a mortgage for either type of home.
Purchasing a townhouse is more similar to purchasing a single family home: you own the structure and the land. Contrast that with buying a condo, where a buyer only purchases the space of the actual unit.
It’s important to classify the property correctly; buyers should confirm the designation with their realtor. Whether real estate is considered a condo or a townhome is a legal designation. Although describing many buildings a condo or a townhouse may seem obvious, there are some hybrid condos featuring detached units, site condos, or other variations. Aesthetically, buyers may not think there is a large difference between a townhome and a condo, but in terms of obtaining a mortgage, there are many differences.
"Townhomes and Condos may appear to be the same as both property types share a roof and walls. However there is a specific distinction between the two," reiterates Tara Jones, VP of Mortgage Lending at Guaranteed Rate. "It’s important to talk with your agent and lender about the property type as condos have their own unique set of documentation requirements depending on the loan."

Qualifying for a Condo Mortgage
To purchase a condo, it is not only you that needs to be approved as a buyer, but the condo also needs to be approved by your lender. For example, this means that a condominium building - and all condo documents - will require FHA approval if you are using an FHA loan. Other lenders, including VA, Fannie Mae and Freddie Mac, have their own requirements that must be met before a condo mortgage to be approved.Some lenders will not finance the purchase of a condo under any circumstances.
Considerations will differ between lenders, and will include the percentage of restaurants and stores in the building, the percentage of investor-owned versus owner-occupied units in the building, and HOA reserve and insurance.
Condo loans may also require larger down payments and higher interest rates than loans for townhouses. The primary issue with a condo loan, in the eyes of a lender, is that other unit owners may default on HOA dues, which puts building maintenance in a precarious position, which in turn affects the value of each unit.
Condominiums are often maintained in a pre-approval list by lenders, which reflect up-to-date reviews of condo documents, HOA reserves, and certificates of insurance. A unit in a condo building that is included on a pre-approved list will be faster to obtain a mortgage on.
Townhouses Are Less Complicated to Finance than Condos
Because a buyer owns the dirt that a townhome sits on, purchasing one is more similar to purchasing a single family home than a condo. Like a condo, a townhouse must be appraised and pass inspections for final loan approval.Terms for mortgages on townhouses are often the same as for single family homes, or duplexes. The primary difference is that HOA documents, reserve, and insurance will be reviewed on a townhome purchase.