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What Is an FHA-Approved Condo?
If you’re a homebuyer planning to use an FHA loan, you might have trouble finding an FHA-approved condo, because fewer than 7% of condominium projects have FHA approval.
In 2019, the FHA released new guidelines that allow buyers to get an individual condo FHA approved, allowing you to take out an FHA loan on one condo unit — even if the entire complex hasn’t received FHA approval. This change might give you more choice about what condo community you buy in, and it gives you a lot more options than you had under the old restrictions.
What is an FHA loan?
The program is designed to help buyers who don’t have the excellent credit record required for a conventional loan. FHA loans also have lower down payment requirements than traditional mortgage loans, making it easier to buy a house if you don’t have a lot of money saved up.
With a traditional mortgage, lenders generally look for a credit score of 640 or higher. They also expect you to have a down payment of at least 10% to 20% to qualify for the loan.
If your credit score is as low as 500, you might still qualify for an FHA loan, but it will depend on the lender. If your score is above 580, the lender may accept a down payment of 3.5%, but you’ll need to come up with a 10% down payment if your score is below 580.
FHA mortgages use a lower debt-to-income ratio — 43% compared with 45% for a conventional mortgage. That means you’ll qualify for a slightly smaller mortgage than you would if you were seeking a traditional loan.
The drawback to an FHA loan is that you have to pay for mortgage insurance, which ensures the lender will get back its money if you default on the loan. A hefty premium, 1.75% of the loan principal, is due at closing. After that, you pay an annual premium that’s split into monthly payments and added to the monthly mortgage payments you’ll make on your loan.
What is an FHA-approved condo?
Condominiums must meet certain standards to be FHA approved, making them eligible for buyers to get an FHA loan. When approving a loan on a condo, the agency is looking for evidence the complex is financially viable and will remain so — which helps protect both your and their investment.
Until 2019, the agency only approved condo complexes, and it continues to approve entire projects. Condominiums with FHA approval meet standards such as:
- No more than half the units are rentals or owned by investors
- Less than 35% of the property is commercial space
- No more than half the units are financed with FHA loans
- Fewer than 15% of owners are more than 60 days late in paying their association fees
The community also must have adequate reserves and meet insurance requirements.
In late 2019, the FHA announced it would approve individual condo units in a condo complex that is not FHA-approved. This rule allows you to apply for an FHA loan if you want to buy a condo in a complex that doesn’t have FHA approval.
To receive an FHA loan on a single condo unit, the unit you choose must be in a community where:
- There are at least five units
- No more than 10% of units have FHA loans on them
- At least half the units are occupied by owners
- No more than 35% of the space is used for commercial purposes
- The entire project has been built, with no new phases under construction
Benefits and drawbacks of getting your condo FHA-approved
The primary benefit of getting one unit in a condominium FHA-approved is that it gives you more options when looking for a condo that you can buy with an FHA loan. You don’t have to limit your home search to condominium projects with FHA approval.
Although the condo you choose doesn’t have to be in an FHA-approved complex, the condominium project and association must meet all the requirements for full approval.
Condominium developments may not seek FHA approval for many reasons. The paperwork involved can be complicated, and it must be resubmitted every three years. Condo communities may also avoid FHA approval because current owners believe that people who receive FHA loans might be at higher risk of defaulting on their loans.
However, getting FHA approval opens the pool of potential buyers, which benefits current owners when they decide to sell their condos as well.
How can you get your condo FHA-approved?
The FHA refers to getting a single condo FHA-approved for a loan as “single unit approval.”
According to FHA Review, the process is “not nearly as simple or as easy as people hoped” it would be. Getting single unit approval has more guidelines than getting an entire condo project FHA-approved.
[ More: The Guide to an FHA Refinance ]
Your mortgage lender must handle the paperwork for single unit approval. That requires submitting a five-page approval questionnaire (Form HUD-9991). The condo association or management company must fill out most of the form and submit relevant documents, such as copies of insurance policies, association budgets and recorded covenants.
The questionnaire requires information proving the complex meets all the FHA requirements, such as:
- Number of owner-occupied and rental units
- Number of units where the owners are more than 60 days past due on association fees
- Amount of commercial space in the complex
- Whether the condo association has insurance covering interior improvements, replacement cost for the project and liability insurance
- Whether the community has adequate reserve funds