real estate

Condo or home for college grad?

Steve McLindenq_v2.gifDear Real Estate Adviser,
I am a 23-year-old recent college grad looking to build equity as soon as possible. I live in a small eastern city and have encountered the opportunity to either buy a condo or house. Which would be a better choice?
-- Luis G.

a_v2.gifDear Luis,
Not to deride condos, they're the housing of choice for aspiring homeowners in many urban areas. But their values tend to be more mercurial at present than single-family homes, and financing them can be a challenge.

While it's a little easier now to get a condo loan than a year ago, you'll still find tight restrictions, particularly if you need an FHA-backed mortgage. Typically, an FHA lender will approve you only if at least 50 percent of the units in a complex have either been sold or placed under contract (by owner-occupiers, not investors). Additionally, if 15 percent or more of the units are more than 30 days past due on payments, that could be another loan stumbling block. If a condo board doesn't set aside at least 10 percent of its dues toward reserves and improvements, loan approval also might be a problem, especially if the complex is in an area where values have consistently declined.

If you do go the FHA condo route, be prepared for the loan approval process to take longer while the lender applies those FHA tests. However, if an entire condo project is FHA approved, which many now are, buyers will find a smoother road to financing. At present, down payments for condos are a little higher (20 percent to 25 percent) than for single-family homes (10 percent to 20 percent), although FHA down payments can be much lower.

Among the "pros" for condo living are ease of upkeep and "location, location, location," especially for city dwellers who desire amenities and transit options that are usually in short walking distance. Condo "cons" include the monthly maintenance fees and a condo board that decides how those fees are spent, sometimes forcing owners to subsidize amenities they don't use (By the way, condo maintenance fees aren't tax deductible). In many condo communities, foreclosures and delinquent dues have forced associations to pass along shortfalls to other owners. You'll also have to get the condo board's permission for any renovations you might want to make (some housing developments also have associations and similar restrictions).

In a house, you will have a yard, the freedom to make improvements and the option of having pets, but you'll also have greater upkeep requirements plus a lot more space to fill with potentially expensive "stuff."

In either case, always consider the neighbor of the condo or home. As a fresh-out-of-college person, you'll probably want to be around young professionals instead of the Baby Boom set, and both groups tend to reside more heavily in urban condos. Also, remember, great location is a bigger factor in buying a condo than a single-family home.

Dollar for dollar, condos tend to appreciate less in value than single-family homes, but not at all price points or in all markets. Single-family homes are generally a little easier to sell, particularly in the present with so much available condo inventory.

So, do your homework!

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Real Estate Adviser columns and more stories about mortgages. To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic.

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