When buying a condo with a VA loan, the first thing to understand is that not all condos qualify for VA financing. Do not look at many condos that may not even be VA-eligible. And make sure you understand all of the numbers. By numbers, we mean you should have a good understanding of the full payment range of each price point you aim for and understand how those numbers will fit into your budget. Ensure you get a good estimate of how much money will be needed to complete the purchase. As a Veteran using the VA loan program, it is possible to buy ANY priced home with a $0 down payment now that there are no VA loan limits for 100% financing. But there are still closing costs. Find out how much to expect for closing costs and prepaid expenses. If you don’t have enough money to cover the closing costs and prepaid expenses, there are strategies for that. More on this later.
There is a big disconnect between what a first-time home buyer thinks a payment will be for a home and what the actual payment will be when all items are included. So what makes up the full mortgage payment, or “PITI”? (and HOA)
- P = Principal
- I = Interest
- T = Taxes on the property
- I = the second “I” is for insurance on the property.
- HOA Dues = Homeowners Association Dues.
Everyone knows about P&I or the Principal and Interest portion of the mortgage payment. A $500,000 30-year fixed VA loan at an interest rate of 3.5% would have a Principal and Interest payment of $2,245. The interest rates move up and down based on many factors. If interest rates were at 4.5%, the P&I would be $2,533. So, knowing where interest rates are will help you to know the P&I range you will be looking at for your home.
T=Property Taxes
Property taxes in California are typically estimated using a factor of 1.25% of the purchase price divided by 12. Based on this assumption, a $500,000 condo would have property taxes of $521. ($500,000 x 1.25% / 12 = $521). Property taxes vary from city to city and even from condo project to condo project. For example, a VA approved condo in Ladera Ranch may have a tax rate of 1.7% versus a VA-approved condo project in Aliso Viejo with a tax rate of 1.05%. At a $500,000 price, the property taxes in this Ladera Ranch condo would be $708 per month. The same priced condo in Aliso Viejo (using the 1.05% tax rate) would be $437 per month. Be aware of how property taxes can affect your total payment.
I=Homeowners Insurance
Homeowners insurance for a condo is less than it would be on a Single-Family detached home. Condo insurance is only needed to cover what happens “inside the walls” of your condo. The HOA will have insurance covering what happens outside your condo’s walls. In some cases, the HOA may even have insurance covering “inside the walls”, although this is rare. The insurance industry calls a condo insurance policy an “HO-6” policy. A good estimate of how much condo insurance will cost is to use .15% of the loan amount divided by 12. But as in all cases, numbers will vary depending on the property and the amount of insurance you may choose to have that is above and beyond the minimum requirements for the loan. For a $500,000 loan amount, we will estimate the monthly insurance to be $62. ($500,000 x .15% / 12 = $62)
HOA, or Home Owners Association dues. When you buy a condo, there will be HOA dues. These can vary from condo project to condo project depending on several factors. The HOA dues are affected by the amenities in the condo project. If the condo project has a nice pool, gym, park, etc., the HOA dues may be more expensive than a condo in a “no-frills” project with little required upkeep. Typical HOA dues for condos in Orange County can vary from $250 up to as much as $600 or more, depending on the property.
Total PITI & HOA
So in the case of our $500,000 condo, the total PITI & HOA would range between $2,994 (using a 3.5% rate, 1.05% tax rate, and $250 HOA dues) and $3,900 (4.5% rate, 1.7% tax rate, and $600 HOA dues). That is a wide range and is a big reason why you should be working with a local Orange County VA lender who can ensure you have the right numbers before making an offer on a home. Your VA lender should have an intimate knowledge of the local market, know how to quickly verify if a condo is VA approved, and be able to provide a personalized VA Total Cost Analysis that will break down all of the numbers for you, including the full payment and a breakdown of the closing costs.
Authored by Tim Storm, an Orange County VA Loan Officer specializing in the VA Loan program. MLO 223456. – Please contact my office at Arbor Financial Group. My direct line is 949-829-1846. www.OrangeCountyVALoans.com. I will prepare custom VA loan scenarios that match your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you can fully understand the numbers BEFORE starting the loan process.