The difference between condos and townhouses is often thought to be their construction style. But, it’s the type of ownership that defines the two.
If you’re shopping for a new home, you may be wondering what the difference between a condo and a townhouse is?
The key difference between owning a condo and a townhouse is how you hold the title. With condominium ownership, you own the space inside the walls. When you own a townhouse, you own it fee simple, which means you own the structure and land beneath it.
Owning a condo or a townhouse has pros and cons, but which one is right for you?
This article will compare all the differences between condos and townhouses, the benefits and drawbacks of each option, and explain the difference in ownership in more detail.
- What’s the difference between condos and townhouses?
- How condo ownership works
- Covenants, Conditions, and Restrictions (CC&Rs)
- Mortgage financing for a condominium
- Benefits of owning a condo or townhouse
- Is a condo or townhouse right for you?
What’s the difference between condos and townhouses?
You likely recognize condominiums and townhouses by their style of construction. Condos are built-in apartment-style buildings, while Townhouses are similar in style to a traditional detached home.
Unlike single-family detached homes, adjacent neighbors in a townhouse share one to two walls.
Condos are often two levels or more and have many units in one building. Defined as low, mid, and high-rise, a high-rise condo is considered seven floors and above in the US, while a low rise is generally three floors and below. This standard may change by country or region.
When looking at condo buildings and townhouse communities, most condo units feature an exterior stairwell or shared access to an interior hallway, while townhouses have an outside front door entrance.
Newer townhouses are primarily in communities with a Homeowner’s Association and have some shared features, like a pool. In older parts of America, townhouses are considered rowhouses that line cities for blocks.
Condominium communities often have more features than townhouses, including a clubhouse, gym, and pool.
How condo ownership works
When buying real estate, the two most common types of ownership are ‘Condominium’ and ‘Fee Simple.’ Fee simple means you own the home and land beneath it.
When you purchase a condo, you don’t own the parcel of land below you or the air space above. You also don’t own the walls. Condominium ownership means you own the interior space inside the walls.
You also own an interest in the common areas of the condominium development. This provides you the right to use the parks, pool, and workout room within the unit—with strict bylaws regarding how and when you may.
The advantage of not owning the physical property is damage or repairs to the roof or exterior are the association’s responsibility.
Covenants, Conditions, and Restrictions (CC&Rs).
When owning a condo or townhouse, you’re subject to the rules and regulations of the condo and homeowners association. The Covenants, Conditions, and Restrictions (CC&Rs) outline these rules and regulations.
CC&Rs are provided to you by the seller during the escrow process. Most states have laws requiring sellers to pay for and provide an HOA Resale Package that includes CC&Rs.
Living in a community with CC&Rs comes with some shared responsibility. You will have to pay monthly dues to cover the costs of maintaining common areas like pools or gyms. The monthly dues in a condo community usually include water, sewer, trash, landscaping, and building maintenance.
Association dues for townhouses and low-rise condo units are commonly between $200 to $300 a month. High-rise condos are much more expensive, with some monthly association dues in the thousands.
Some townhouses have fewer amenities and leave the maintenance of the property to the owner. These communities will have lower HOA dues, especially if trash, sewer, and water are not included.
It’s essential to determine how much the HOA and CIC dues are and what they include before making an offer. Since dues for condos and townhomes are high, be cautious with your debt-to-income ratios as they could affect your ability to finance the purchase.
Mortgage financing for a condominium.
As you’ve learned, when you own a condo unit, you own the space within the walls and a right to the common areas. Because of the condo ownership structure, qualifying for mortgage financing has different stipulations than a single-family home or townhouse.
A condo loan is a specialized type of loan financing. For the condo to be qualified for a conventional mortgage, Fannie Mae and Freddie Mac—a government-sponsored entity that provides liquidity to banks and mortgage companies to make loans— must approve the community itself.
This qualification defines the communities as warrantable or non-warrantable.
What is a warrantable condo?
A warrantable condo meets the specific criteria of Freddie and Fannie and is qualified for a conventional mortgage. The requirements a condo community must meet limit the risk of decreasing values or hazards to the building for the loan provider.
For a condo community to be considered warrantable, it must meet the following requirements:
- Investors can’t own more than 50% of the units
- No more than 10% of the units can be held by a single entity
- No more than 20% of the units can be non-residential space; generally, added timeshare or hotel is the non-qualifier
- The HOA must designate at least 10% of the annual budget to reserves
- No more than 15% of units can be 30 to 60-days delinquent on HOA dues
- The HOA must have adequate liability, fidelity, and primary insurance
- The HOA budget must be thoroughly reviewed
What makes a condo non-warrantable?
Aside from the warrantable criteria specified above, a condo community may be non-warrantable due to further restrictions.
If the condo community meets any of the following criteria it’s considered non-warrantable — making financing more challenging, if possible at all.
- The HOA or complex is involved in a lawsuit
- Requires a membership (i.e., Yacht, golf, or country club)
- Operates as a condotel, a mix of condos and hotel units
- The community is considered a care facility
You can search if a condo community is FHA-approved at this HUD.gov link. However, it’s best to ask your lender and Realtor to verify if the community is warrantable.
Your Realtor can verify if recently closed sales used conventional or FHA loans, while lenders often keep an updated list of condo communities approved by Freddie Mac and Fannie Mae.
Property taxes vary by state. This tax rate is the same regardless of owning a condo, townhouse, or single-family home.
Since taxes are based on the property’s assessed value, and condos are usually less expensive, you will pay fewer property taxes.
What are the benefits of owning a condo or townhouse?
One key benefit of a condo is they are often more affordable than traditional detached homes and townhouses. Condos also offer a sense of community and can be an excellent option for people who don’t want to worry about maintaining a yard.
Besides the unit itself, most condominium communities will have more features like a pool, gym, or parks.
If you’re looking for more space than a condo offers, Townhouses can be a great option. They also come with the added benefit of owning the land and structure below them.
The low-maintenance side of condo living has its appeal, with the sacrifice of neighbors living above or below you.
What’s the difference between townhouses and condos?
- Townhomes are fee simple and you own the structure and land. For condos, you own the space inside the walls and a right to common areas.
- Townhomes are similar in construction to single-family homes. Condos are similar to apartment buildings.
- Townhomes share one to two walls while condos may have neighbors bordering each side, including up and downstairs.
- Condos often have more shared amenities.
- Condos can be more difficult to finance since the complex must be warrantable.
Both condos and townhouses offer a sense of ownership and security that you won’t find when renting. When wanting a place to call your own, either option is a great choice.
Deciding if a condo or townhouse is the right fit for you often depends on budget and lifestyle. It would be best if you took some time to tour condo and townhouse units to see what best suits your needs.
In the end, what fits your current and long-term needs is best.
Happy home hunting!