For many first-time homebuyers, it can seem to be a distant dream to own a home, especially when it comes to saving for a sufficient down payment. However, the idea of purchasing a condominium, also referred to as a condo or apartment, with a small down payment can actually be a more achievable goal. This can be true even for those with limited savings. Condos offer a variety of advantages including lower maintenance responsibilities, amenities and generally lower price points than single-family homes. Whether you are eager to enter the housing market or looking for a manageable home purchase option, this information will walk you through how to purchase a condo with a small down payment.

Understanding Down Payment Requirements
Before diving into the specifics of buying a condo, it is essential to understand the role of a down payment in the home-buying process. A down payment is a percentage of the condo's purchase price that you pay upfront. The remainder is financed through a home loan often called a mortgage. Traditionally, homebuyers are advised to put down 20% of the home's purchase price, but this can often feel out of reach for many first-time buyers.

Luckily, there are ways to buy a condo with a smaller down payment. In fact, many lenders offer loan programs specifically designed for buyers who cannot afford a large down payment. For example, whena smaller down payment is considered, buyers can put 3%, 5% or 10% down payment with a conventional loan. Or, they can put 3.5% down payment with a FHA loan.  

Generally, the smaller your down payment, the higher your monthly mortgage payments since you be borrowering a larger amount. A smaller down payment may still be worthwhile as it enables you to purchase a property sooner and start building equity.

How a FHA loan can help purchase a certain condo?
Many condos can be challenging to purchase a condo. For example, condos throughout the state of Florida often need a 10% or 25% down payment. Many times, a limited review or full review condo questionnaire is needed. This is when the lender requests a series of questions to be answered by the association. These questions can ask how many owners vs renters are in the building; does any owner have majority control of the association; does the association have litigation; is there any known structural damage; etc?

The answers to the questions, along with the association's budget, can dictate how much of a down payment will be required. Generally, the association will need to have at least ten percent of the budget in reserves. For example, if the association collections $1,000,000 from all of the residents in the building in a year, they would need to have at least $100,000 in a bank account for their reserves. This can be looked at from various angles. But, one easy angle to look at is emergencies. If the building needs an immediate repair or needs to take care of something right away, does it have sufficient funds to do so?

There are also FHA approved condo lists where a prospective homebuyer can review and find various buildings which were approved for FHA.

Smaller Buildings Can Offer an Advantage
If the building has 4 or less units, many times, it will not need to undergo the same guidelines as a larger building. This could mean being able to put a small down payment to help purchase and finance a condo unit.

When Considering Using FHA for a Condo Purchase, Know Some of the Requirements:
Credit Score: While FHA loans are more lenient with credit scores than conventional loans, you generally need a credit score of at least 580 to qualify for the 3.5% down payment. If your score is between 500 and 579, you may still qualify but will need to make a 10% down payment.

Primary Residence: FHA loans can only be used to purchase a home that will be your primary residence, meaning you can’t use this loan to purchase a second property or an investment property.

Condo Eligibility: Not all condos are eligible for FHA financing. The condo complex must be on the FHA’s approved list, which means the development must meet certain criteria, such as being well-maintained and financially stable. You can check the eligibility of a condo through the U.S. Department of Housing and Urban Development (HUD).

While FHA loans are an excellent option for those with smaller down payments, it’s important to consider that FHA loans require mortgage insurance premiums (MIP) for the life of the loan, which increases monthly costs.

Alternative Option: Save for a Larger Down Payment or Obtain a Gift
If you have family members who are willing to help, they may be able to gift you the funds for your down payment. Many loan programs, including FHA and conventional loans, allow for gifted down payments. However, you’ll need to provide documentation to prove that the funds are indeed a gift and not a loan that you’ll need to repay.

If you’re considering using a gift for your down payment, ensure that your family members are aware of the potential tax implications. Gifts exceeding that amount may require the giver to file a gift tax return.

Look for Condos in More Affordable Areas
While you might have your heart set on a specific neighborhood or location, one way to make a condo purchase more affordable is to broaden your search area. Consider looking in neighborhoods or regions where condo prices are lower. You might also explore less densely populated areas or those undergoing revitalization, where properties may be more reasonably priced.

Additionally, consider the size and age of the condo. Smaller units or older buildings can often be purchased for less, although it’s important to evaluate the property’s condition and the potential for future maintenance issues.

Secure a Pre-Approval for Your Mortgage
Once you've decided on the financing options that work best for you, it’s important to secure pre-approval for a mortgage. Pre-approval is an essential step in the home-buying process as it shows sellers and real estate agents that you're a serious buyer. It also helps you understand how much you can afford to borrow and what your monthly payments will be.

To get pre-approved, you’ll need to provide documentation of your income, employment history, debts, and assets. It’s a good idea to shop around and compare mortgage offers from multiple lenders to ensure you get the best deal for your situation.

In summary, purchasing a condo with a small down payment is entirely possible for first-time homebuyers, especially with the variety of loan programs and financial assistance options available. By making informed decisions and being proactive about your financing options, you can make your dream of condo ownership a reality without having to wait years to save for a large down payment.