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Townhouse and PUD Mortgage Guidelines

Townhouses and planned unit developments (PUDs) are property types where homeowners typically share walls or common areas but may own their lot individually (PUD) or hold an interest in common elements (condo classification). The legal classification as PUD or condominium determines the mortgage review process, with PUDs receiving streamlined treatment similar to single-family homes and townhouse condos requiring full project-level review.

Key Takeaways

  • The mortgage classification of a townhouse depends on its legal structure (PUD vs. condominium), not its physical appearance. Two identical-looking townhouse rows can have different underwriting requirements.
  • PUD properties receive streamlined underwriting similar to single-family homes, without the extensive project-level review required for condominiums.
  • Townhouses classified as condominiums require full condo project review including HOA questionnaire, insurance verification, reserve analysis, and warrantability determination.
  • PUD homeowners hold fee-simple title to their lot and structure, while condo owners hold airspace rights and an undivided interest in common elements.
  • FHA and VA do not require PUD-specific project approval, making PUDs easier to finance with government-backed loans compared to condos.
  • HOA fees for both PUDs and townhouse condos are included in the borrower's total housing expense for DTI calculation.
  • Insurance structures differ: PUD owners carry individual homeowners policies, while condo owners rely on the association's master policy plus an individual HO-6 policy.
  • Buyers should verify the legal classification (PUD vs. condo) early in the purchase process to avoid underwriting surprises and timeline delays.

How It Works

How the Lender Determines Property Classification

When a borrower applies for a mortgage on a townhouse-style property, the lender determines the legal classification through several sources. The appraisal report identifies the property type. The title commitment describes the legal interest being conveyed (lot ownership vs. condominium unit). The preliminary title search reveals whether the property is part of a recorded condominium declaration or a PUD plat. The MLS listing may provide initial guidance, though MLS classifications are not always accurate for mortgage purposes.

If the property is classified as a PUD, the lender confirms PUD membership and proceeds with a standard residential underwriting workflow. The appraiser uses Form 1004, the same form used for single-family homes, with additional notes about the PUD characteristics and HOA fees. The underwriter verifies that no adverse conditions exist and that the HOA fees are factored into the DTI calculation.

If the property is classified as a condominium, the lender initiates the condo project review process in parallel with the borrower underwriting. This dual-track approach is identical to the process described on the condo mortgage requirements page: the HOA questionnaire is ordered, insurance and financial documents are collected, and the project is evaluated against warrantability criteria.

Loan-Level Price Adjustments and Pricing

Fannie Mae and Freddie Mac pricing treatment differs by classification. PUDs are generally priced the same as single-family residences with no additional LLPAs for property type. Condominiums carry specific LLPAs that add cost. This pricing differential can be meaningful: a property classified as a condo might carry an additional LLPA of 0.375% to 0.75% depending on LTV, which translates to a higher interest rate or upfront fee compared to the same structure classified as a PUD .

This pricing difference is one reason why the legal classification matters beyond just the review process. A borrower purchasing a townhouse in a PUD development benefits from single-family-equivalent pricing, while a borrower purchasing a physically identical unit in a condo-classified development pays more. Builders and developers who structure new townhouse communities as PUDs rather than condominiums may be doing so in part to provide their buyers with more favorable financing terms.

Down Payment Requirements

Down payment requirements for PUDs mirror those for single-family residences across all loan programs. Conventional loans are available with as little as 3% down (for eligible first-time buyers) or 5% down for standard borrowers. FHA requires 3.5% down. VA requires zero down for eligible veterans. USDA requires zero down in eligible areas.

For townhouse condominiums, down payment requirements are the same as for other condo units, which are generally equivalent to single-family requirements for warrantable projects. However, non-warrantable townhouse condos face the same elevated down payment requirements as any non-warrantable condo: typically 20-25% minimum through portfolio or non-QM lenders.

This creates a scenario where two adjacent, identical-looking townhouses can have dramatically different minimum down payments if one is in a warrantable condo development and the other is in a non-warrantable condo development. The PUD next door might offer 3% down conventional financing. These differences underscore why understanding the legal classification and project warrantability is essential before committing to a purchase.

Detached Condos and Attached PUDs

Adding to the classification complexity, detached units can be structured as condominiums, and attached units can be structured as PUDs. A development of detached single-family-looking homes can be organized under a condominium declaration if the developer chose that structure (perhaps to retain control of certain amenities or to simplify exterior maintenance through the association). Conversely, a row of attached townhouses can be platted as individual lots in a PUD.

The physical appearance is never determinative. Lenders, appraisers, and title companies look at the recorded legal documents to determine how the property is classified. Borrowers and agents who rely on visual inspection or MLS descriptions may be surprised when the underwriting process reveals a different classification than expected. This is why pulling the title commitment and reviewing the CC&Rs early in the transaction is a best practice.

Refinancing Considerations

Refinancing a townhouse or PUD follows the same classification-dependent process. A PUD refinance is straightforward, mirroring a single-family refinance with standard documentation. A townhouse condo refinance triggers the condo project review, which must confirm current warrantability status at the time of refinancing, not at the original purchase. A project that was warrantable at purchase could become non-warrantable if conditions have changed (higher investor concentration, lapsed insurance, new litigation), limiting the refinance options available to the unit owner.

Related topics include single-family residence mortgage guidelines, condo mortgage requirements (warrantable vs. non-warrantable), multi-unit owner-occupied mortgage guidelines (2-4 units), mixed-use property mortgage guidelines, and property type impact on loan eligibility.

Key Factors

Factors relevant to Townhouse and PUD Mortgage Guidelines
Factor Description Typical Range
Legal Classification (PUD vs. Condo) Determines the underwriting path, documentation requirements, and potential pricing adjustments. PUDs follow a streamlined process; condos require full project review. PUDs: SFR-equivalent pricing and review. Condos: additional LLPAs of 0.375-0.75% and 5-10 day longer processing .
HOA Fee Amount Monthly HOA dues are included in total housing expense for DTI calculation. Higher fees reduce the loan amount the borrower can qualify for. Townhouse/PUD HOA fees range widely from $50-$600+/month depending on amenities, location, and services included.
Unit Position (End vs. Interior) End units with only one shared wall typically command higher values than interior units. Appraisers adjust for this difference in comparable selection. End unit premiums of 3-8% over comparable interior units are common in most markets .
Warrantability (Condo-Classified Only) Townhouse condos must meet the same warrantability criteria as any condo. Non-warrantable status limits financing options and increases costs. Warrantable: standard agency terms. Non-warrantable: 20-25% minimum down, 0.50-1.50% rate premium.

Examples

PUD Townhouse with Streamlined Conventional Financing

Scenario: A borrower purchases a townhouse in a 200-unit PUD community for $375,000 with 5% down. The development was platted with individual lots, and each owner holds fee-simple title. The HOA charges $175/month covering landscaping, pool, and community maintenance.
Outcome: The property is classified as a PUD. No condo project review is required. The lender uses the standard residential underwriting process with Form 1004 appraisal. No property-type LLPA is added. The $175 HOA fee is included in the housing expense for DTI at the same level as taxes and insurance. The loan closes on a standard 30-day timeline with no project documentation delays.

Townhouse Condo Requiring Full Project Review

Scenario: A borrower purchases a townhouse unit in a 60-unit community for $340,000 with 10% down. The development is organized as a condominium despite the townhouse-style construction. The buyer's agent described it as a townhouse, but the title commitment reveals a condominium unit conveyance.
Outcome: The lender initiates a full condo project review. The HOA questionnaire reveals 48% owner-occupancy (below the 50% Fannie Mae threshold), triggering a non-warrantable classification. The borrower cannot use conventional agency financing. A portfolio lender offers financing at 20% down and a rate 0.75% above the original quote. The borrower must either increase the down payment from $34,000 to $68,000 or find a lender with more flexible non-warrantable criteria.

VA Loan on PUD Townhouse Without Project Approval

Scenario: An eligible veteran purchases a PUD townhouse for $290,000 with zero down payment. The community has an HOA but is structured as a PUD with individual lot ownership.
Outcome: Because the property is a PUD rather than a condominium, VA does not require the project to be on the VA-approved list. The veteran proceeds with standard VA financing terms: zero down payment, no mortgage insurance, and no additional property-type pricing adjustments. The VA appraisal uses the standard residential form and evaluates the property against VA minimum property requirements. The loan closes without project review complications.

Common Mistakes to Avoid

  • Relying on the MLS listing or agent description to determine whether a townhouse is a PUD or condo

    MLS data frequently mislabels property types. A property described as a townhouse may be legally a condominium, which triggers the full project review process. Always verify the legal classification through the title commitment and CC&Rs before making financing assumptions.

  • Assuming PUDs and condo townhouses have identical mortgage terms

    PUDs receive single-family-equivalent pricing with no additional LLPAs, while townhouse condos carry condo-specific pricing adjustments. The difference can be 0.375% to 0.75% in LLPAs, translating to meaningful cost differences over the loan term.

  • Underestimating the impact of HOA fees on mortgage qualification

    HOA fees are added to the monthly housing expense used in DTI calculations. A $300/month HOA fee effectively reduces the mortgage amount the borrower can qualify for by approximately $45,000-$55,000, depending on the interest rate . Buyers should factor HOA costs into their affordability analysis before house hunting.

  • Not verifying warrantability status for townhouse condos before going under contract

    Discovering non-warrantable status after the appraisal and inspection are paid can result in wasted costs and a failed transaction. Buyers using agency financing for a townhouse condo should request a preliminary warrantability assessment before committing.

Documents You May Need

  • Title commitment showing property legal description and classification
  • CC&Rs (Declaration of Covenants, Conditions, and Restrictions)
  • HOA contact information and current fee schedule
  • HOA questionnaire (for condo-classified properties only)
  • Association insurance certificates (for condo-classified properties only)
  • Individual homeowners insurance policy (for PUD-classified properties)

Frequently Asked Questions

Is a townhouse classified as a condo or a PUD for mortgage purposes?
It depends on the legal structure of the development, not the physical style of the building. If the development is organized under a condominium declaration, the townhouse is a condo for mortgage purposes. If it is platted as individual lots in a planned unit development, it is a PUD. The title commitment and CC&Rs determine the classification.
Do PUDs require a condo project review?
No. PUDs are reviewed under streamlined procedures similar to single-family residences. The lender confirms PUD membership and HOA existence but does not require the detailed project-level financial, insurance, and ownership analysis that applies to condominiums.
Are mortgage rates higher for townhouses or PUDs compared to single-family homes?
PUDs generally receive the same pricing as single-family homes with no additional property-type LLPAs. Townhouse condominiums carry condo-specific LLPAs that modestly increase the rate. The difference depends on the legal classification, not the physical structure.
Can I use an FHA loan to buy a townhouse?
Yes. If the townhouse is a PUD, standard FHA financing applies without project approval. If the townhouse is a condominium, the project must be on the FHA-approved list or qualify under FHA Single-Unit Approval. FHA down payment and credit requirements are the same regardless of property type.
How do shared walls affect the appraisal value?
Appraisers account for shared walls through comparable selection and adjustments. End units (one shared wall) typically appraise higher than interior units (two shared walls) due to additional windows, natural light, and privacy. The appraiser uses comps with similar unit positions when available and adjusts for differences when necessary.
Does the HOA fee count toward my debt-to-income ratio?
Yes. Monthly HOA fees are included in the total housing expense along with principal, interest, taxes, and insurance. This combined amount is divided by gross monthly income to calculate the front-end (housing) DTI ratio. High HOA fees directly reduce the loan amount you can qualify for.
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