Can You Buy an Apartment?
LS
Summary:
Yes, you can buy an apartment! You probably won’t buy the one you’re living in right now, but it is possible to buy an apartment. You might consider doing so if you’re not in a position to purchase a house right now, or if you’re just not interested in taking on all the work that comes with owning a house. Buying an apartment differs in important ways from buying a house, which are worth considering before making a decision.
Tired of giving your money to a landlord when you could build equity in a home yourself? Then it might be time to start thinking about buying a place of your own. But if the idea of buying an entire house seems daunting, and if doing all the upkeep that goes along with it feels less than appealing, you might want to consider purchasing an apartment or condominium. Or maybe you are interested in buying an apartment as an investment.
In your quest to buy a place, you will want to talk to real estate agents, mortgage lenders, and probably even a lawyer. While there are certain advantages to buying into a multi-unit apartment building, it comes with a complicated set of rules and fees that you wouldn’t encounter when purchasing an entire building such as a single-family home.
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What to know before you buy
Before you even start looking to buy, you may want to consider talking to a real estate agent and researching mortgage lenders. Often, you will need preapproval before you can bid on a unit. This will also give you an idea of what you can afford in your area. Unless you’re buying a place on Central Park West in New York and money is no object, you will need to determine your budget before shopping.
One important factor: your debt-to-income ratio
In addition to looking at your income and credit report, an important consideration for loan approval is your debt-to-income ratio (DTI). This is a number, expressed as a percentage, that shows how much debt you have in relation to what you make.
To calculate this number, divide your total monthly debt payments (such as credit cards, student loans, and car loan) by your gross monthly income. For example, if you make $4,000 per month and your total debt payments are $1,000, your DTI is 25%. That is great by lender standards. Lenders will generally want you to have no more than a 45% DTI, but that can vary.
Appraise your situation carefully before acting
Assess your finances carefully before buying. Requesting a free copy of your credit report is a good place to start, and paying off any outstanding debt you have will go a long way toward improving your credit rating.
Considerations when buying an apartment
Choosing whether to buy an apartment or a single-family home brings up a lot of questions to think through before making your decision.
- Outdoors: One important distinction when you’re buying a unit is that it doesn’t come with any property. You will have the use of common areas, but they may or may not include any green spaces. If you’re a nature lover, you might want to choose a building that has garden areas or is near a park.
- Parking: You might not have many parking options (other than street parking), or you may have to pay extra for a parking space. Sometimes a spot is included in the purchase price, but you will want to make sure of that, especially if the apartment is located in an area where street parking is hard to find.
- Age of building: Pre-war buildings may come with a lot of charm and character, but they can also come with a ton of headaches. You definitely want to ascertain the age of the building and if it appears to be run-down or otherwise in need of repairs. Talk to current residents if at all possible. Remember, if you’re not renting anymore, you will be responsible for anything that malfunctions inside your four walls.
- Neighborhood: You will also want to think about the area around the apartment building. Is there a lot of traffic, noisy bars, or other businesses that could potentially be a nuisance. On the other hand, maybe you want to live in the middle of the action, and that’s fine too. Just be aware of the type of neighborhood you prefer to live in.
Condo buildings vs. Co-ops
You should also think about exactly what kind of apartment situation you want to be in. Whichever avenue you choose, though, remember that there are more restrictions than with traditional homeownership. Condominiums and co-ops are two options that will likely come up in your search.
For example, you may not be allowed to do certain types of renovations or rent out your unit. There could also be regulations regarding pet ownership. Some condo boards or co-ops may only allow dogs under a certain weight — if you have a large dog, you might not be approved.
Co-ops
Co-ops can be tricky because you’re not actually buying a specific unit, you’re buying shares in a corporation that allows you to live there. By buying in (if you’re accepted, which is no guarantee), you join a group of co-op shareholders in jointly owning the building.
You’ll need co-op board and lender approval to buy
As shareholders, you have a say in what goes on, but the ultimate decisions will be made by the co-op board. You will also need to be approved by the co-op board before you can buy in, which can be difficult. Much like employers holding job interviews, they will carefully assess whether you are a good fit for the building.
Getting financing for a co-op can be difficult, as well, because you are not actually purchasing a piece of “real property,” as in the case of a traditional home, townhouse, or condo. Some lenders may consider the prospect too risky (because they can’t foreclose on a unit you don’t own) and won’t approve a loan for a co-op even if you have excellent credit and have gotten approval from the co-op board.
A special loan may not require a special lender
You will want to do some research to find a lender with experience in these matters, but it can be done. Usually, the loan you’ll get won’t be a mortgage per se, but a co-op loan or share loan. You will also pay monthly dues to cover your portion of the co-ops expenses, which may include a portion of the underlying mortgage.
Since you’re not buying real estate property when you buy a co-op, you are not getting a mortgage in the traditional meaning of the term. In effect, you are getting a loan to buy the shares and proprietary lease to live in the co-op unit. Your shares in the co-op and the proprietary lease are the collateral.” — HSBC
Some of the best mortgage lenders may also offer specialized loans for co-op purchases. In some cases, you may also find the best personal loans a useful source of funds.
Condominiums
Condo owners vary from co-op shareholders in that they are deeded owners of their units with an undivided interest in the common areas of the building. As a result, condo owners can find it easier to secure a mortgage. It’s still a bit more complex than purchasing a house, though, because you’re buying into an attached community where the title isn’t held by you.
Added expenses and more complicated loan approval
To manage that community requires fees to be paid on a monthly basis, which may cover your property tax as well as the maintenance and upkeep of the property itself and the common areas. There are sometimes “special assessments,” as well, which could put you on the hook for major renovations or large repairs that the normal monthly dues don’t cover. When considering condo communities, you will want to ask about any upcoming special assessments.
It’s also more complicated to get approved for a mortgage because, not only are lenders going to scrutinize your finances, but they’re also going to investigate the condo association itself. Lenders will want to know things like how many units are sold, how many are owner-occupied (as opposed to being used as investment properties), and whether there are any pending lawsuits against the company. These factors could also affect your insurance rates.
Consult the FHA
It can be helpful to check in with the Federal Housing Administration (FHA) as part of your research. Here is a tool to help you find FHA-approved condominium projects, which can help to ease the loan approval process. Lenders may use some of the same criteria as the FHA, which can give you an added level of security.
Costs of buying an apartment
When you’re budgeting for the costs of buying a new home, you must consider more than just the purchase price, because that doesn’t accurately reflect the full price of owning that piece of property. These costs also apply to other property types, such as townhouses and single-family homes, but they still need considering.
Down payment
The biggest issue after the purchase price is that of a down payment. In most loan situations, you will have to pay some sort of down payment — anywhere from 3.5%–20% of the purchase price, depending on your loan type and lender. The down payment will also help you figure out what your monthly mortgage payments will be.
Closing costs
Then there are closing costs to account for, which can be anywhere from 2%–6% of the purchase price. Closing costs include processing fees paid to the lender and may cover things like appraisal, title insurance, and setting up an escrow account. Depending on the state of the housing market, you can sometimes get a seller to pay a portion of the closing costs. At the time this article is being written, however, because we are in a seller’s market, there is no incentive for a typical seller to pay any of you closing costs.
Property taxes
In addition to all that, you will want to factor in property taxes, insurance, and any monthly maintenance charges or homeowners’ association (HOA) fees when determining your budget.
Types of loans
There are different kinds of mortgages you can get to finance your new home. Your unique circumstances and financial situation will determine which is most appropriate for you. Talking to a mortgage consultant or real estate agent can help you get started on the process.
Two types of loans to consider include conventional mortgages and government-backed loans. Conventional loans are often best for those with an excellent credit score and higher income who can afford a sizable down payment.
Government-backed mortgages, such as those offered by the FHA or the Veteran’s Administration (VA), are often better for first-time buyers, buyers with smaller down payments and less-than-perfect credit scores.
Pros and cons of apartment living
Weigh the advantages and disadvantages carefully when deciding to buy an apartment.
Pro tip — Look into government-backed loans when seeking a mortgage. They usually have less strict credit requirements and lower down payments.
FAQ
Is it better to buy or rent an apartment?
That really depends on your goals — there could be good reasons for either option. Depending on your career, you may plan on moving in a few years, in which case renting might be the best option for you right now. On the other hand, if your career is settled and you’re happy with your location, buying might be the smarter choice.
Is buying an apartment good for first-time buyers?
Buying an apartment can be a great choice for first-time homebuyers. It’s typically more expensive to buy a house than an apartment because it comes with property, so it could be the more affordable choice. Houses also require more maintenance, which may not be desirable if you’re buying a place on your own.
Beware of extra costs, though. The monthly fees that go along with living in a communal setting may end up costing you more on a monthly basis.
At what age can you buy an apartment?
Legally in most states, you can get a mortgage without a cosigner at the age of 18 — with “legally” being the operative word. The main thing once you’ve become a legal adult is not your age, but your financial ability to afford a mortgage. To be in a proper position to buy, you will need to have a good credit score (something many young people haven’t achieved yet), a steady income, and money for a down payment. You can typically buy a home before you turn 18 if you have a cosigner.
Key takeaways
- You can buy an apartment, much like you buy a house, albeit with a few more complications.
- Lenders may consider a mortgage for an apartment higher risk, making it more difficult to gain loan approval.
- You won’t have to maintain the exterior of your new home, but there will be more restrictions on the use of it than with free-standing houses where you own the property it sits on.
- Buying a condo or apartment is typically less expensive than buying a house.
- Monthly maintenance fees can be high, effectively making homeownership less affordable.
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