Chicago First Time Condo Buyers
A Comprehensive Guide For Buying Your First Chicago Condo
Think you’re ready to make the transition from renting to owning? As you probably already know, there’s a lot to think about when it comes to buying a home or condo in Chicago for the first time. And chances are, you also have a lot of questions when it comes to financing, finding the right place, and the overall home buying process. At Gold Coast Realty, we understand the home or condo buying experience can feel a little intimidating for first-timers, which is why we’ve created a comprehensive guide for first-time home buyers who specifically live in Chicago.
What Our First Time Condo Buyer Guide Includes
- Buying a condo vs. buying a house
- Understanding condo financing
- The Best Ways to Save For a Down Payment
- Determining How Much You Can Afford
- Getting Pre-Approved For a Loan
1. The Differences Between Buying a House & Buying a Condo
If you’re planning to transition away from renting and hope to own a place sooner rather than later, you’re probably wondering if buying a condo is a good idea. In Chicago, it’s certainly more common to consider a condo, especially if you’re wanting to live downtown or in one of the city’s trendier neighborhoods. But aside from affordability and location, what else might make buying a condo more appealing?
Amenities & Maintenance
Many condos, especially high-rise condos, also offer access to a wide-range of lifestyle amenities, which often include a fitness center, door service and security, common outdoor space with amazing views of the city, and even an indoor or outdoor swimming pool in certain instances. In addition, there’s also the advantage of living a maintenance-free lifestyle, which can be a big deal for young working professionals living in Chicago.
Many first-time condo buyers in Chicago are still single or of a certain age, which means staying connected to others in the same age group is preferable. A lot of condo buildings downtown also regularly host social functions and gatherings as well, which tends to appeal to more first-time buyers living in a big city.
Access to Transit
Affordable single-family homes in Chicago’s outer neighborhoods, like on the far north or northwest sides for example, aren’t always as conveniently located as countless condos throughout the city when it comes to the CTA or the “L.” So if you’re a first-time home buyer in Chicago and easy access to public transportation is still a priority, opting for a condo may just be the right direction.
2. Understanding Condo Financing
If you need a mortgage to buy a condo, it helps to understand how condo financing works. A condo is usually more affordable than a single-family home, making it a great option for the typical first-time home buyer. Unfortunately, buying a condo with a mortgage can sometimes be more difficult than mortgaging a single-family home, and that’s because condos require special underwriting.
Special underwriting for condos
When you buy a single-family home, the process is usually straightforward. The bank appraises the home and makes sure there’s a clean title. With a condo, the bank also considers the finances of the homeowner’s association. The bank wants to see condo documents and ensure there’s not a scenario in which the property could depreciate. In addition, it’s likely the bank will want to know how many rented units and vacant units there are in the condo development. This will be used to factor how well the property will likely hold its value. All of these things became even more important following the housing crash about a decade ago.
FHA loans for first-time condo buyers
Although a conventional condo mortgage is easier to obtain than an FHA or VA home loan to purchase a condo, FHA loans are still widely used by first time condo buyers in Chicago. To get an FHA loan for a condo, the property you want to buy has to be FHA-approved. In a nutshell, the approval is contingent upon at least half of the condo units being owner occupied. There are also restrictions on the number of units that can be behind on association dues and on how many can already have existing FHA loans.
VA loans for first-time condo buyers
To get a VA condo loan, the entire condo complex has to be approved by the Department of Veterans Affairs. A VA-approved list of properties is a good resource. The upside with these types of loans is that qualified veterans are able to get financing with very little money down.
3. Best Way to Save for a Down Payment
First-time condo buyers likely already know how important a down payment is in purchasing a home. A larger down payment helps ensure a smaller loan and a smaller monthly payment. For most of us, that means it’s time to start saving.
Use a savings account
One great way to save for a down payment is to automatically direct money to a designated savings account every month or every paycheck. Of course, you have to be diligent about not touching the money for any other purpose. You can also cut back on unnecessary expenses and put the savings into the same account.
Trim your credit card debt
You can save money too by paying off your high interest credit cards as soon as possible. If you can’t pay them off immediately, transfer the high interest card balances to a low interest rate card.
If you’re having trouble saving enough for a down payment, you can consider borrowing. Either borrow from a relative or borrow from your retirement plan. Some company-sponsored 401k plans allow employees to borrow in order to purchase a home, although early withdraw fees should be expected should you choose to go this route.
4. Determining How Much You Can Afford
When it comes to determining how much you can afford when buying your first home or condo, there’s really no right or wrong answer. Many different factors can go into determining how much is too much and everyone’s situation is unique. But with all that said, lenders are guaranteed to take into account several primary categories when weighing your risk, which include your household income, monthly debts (car loan, credit card debt, student loans), and the amount of money you’re able to put down upfront.
Total debt-to-income (DTI) ratio
Another component that you’ll need to learn about is your debt-to-income ratio. A DTI is the ratio of your total monthly debts (including what your future mortgage payment could be) to your monthly pre-tax income. So for example, if your monthly debt payments are $3,000 and your total pre-tax income is $8,500, your debt-to-income ratio is 35.3 percent ($3,000 / $8,500 = .3529 x 100 = 35.3 percent).
Depending on your credit score and lender, borrowers might be able to be qualified with a DTI up to 43 percent, but you’ll probably want to be closer to 36 percent to have the best chance for approval and to also get the best possible rate.
If you think you’re ready to buy and home and want to take that first big step, getting pre-approved is the best place to start. In a nutshell, a mortgage pre approval letter demonstrates you’re able to secure a home loan after a lender reviews your credit report and various documents that verify your income, assets, and debts. So how do you know you’re ready to get pre-approved? By taking these 5 components into consideration….
Know your credit score. In general, you’ll want a credit score of at least 620, although some mortgage products allow for something lower. But on the high side, a credit score of 740 will typically enable most borrowers to get the best rates based on current market conditions.
Review your own credit history. Before having someone else check out your credit history, do a thorough review yourself and be sure to dispute any errors you might see. Also resolve any issues or delinquent accounts before starting the pre-approval process as well.
Gather all your income statements, personal information, and financial account summaries. During a formal pre-approval process, you’ll need to submit two years of tax returns, 90 days worth of bank statements, and other personal information and identification; so get it all ready to save you some time.
Reach out to multiple lenders. Although it might seem easy to just contact one lender, it’s always best practice to reach out to multiple lenders to see who can really give you the best deal. Believe it or not, some statistics show comparing lenders and getting the right financing for your individual situation can save a borrower over $9,000 over the span of a 30-year mortgage.
First-Time Home Buyer Resources & Related Content
Looking for more information about first-time home buying in Chicago? Learn more about where first-time home buyers should start a condo search in Chicago or check out all the latest news related to first-time home buying and financing.
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- Millennial Generation Expected to Drive Home Sales in 2020
- 4 River North Condo Buildings First-Time Home Buyers Should Consider
- Low Interest Rates a Key Factor in Buyer Demand in 2020
- Common Mistakes First-Time Buyers Should Avoid