FHA Condo Loans

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A Federal Housing Authority (FHA) mortgage may be a good financing option if you’re considering a condominium purchase.

FHA loans are a great choice for first-time homebuyers, offering lower down payment requirements, higher debt-to-income ratios, and lower credit scores than other types of financing. However, condo loans have some criteria you and the property must meet to be approved.

Here’s what you need to know.

What Is An FHA-Approved Condo?

FHA condo loans are specifically geared toward those who purchase housing units in a condominium building. Not all condos are eligible. To get approved for an FHA loan, condos and single-family residences must be appraised to meet FHA loan standards.

Condos must be approved in advance by the FHA. Before 2019, an entire community needed to go through the approval process, but since that time, individual condos can be approved as well.

Condo communities seeking FHA loan approval must complete the HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP) for lenders. After approval, a condo receives an ID number and submission number and is entered into a database that potential buyers and lenders can easily check to see if it meets FHA standards.

Condo buildings must be 25-75 % owner-occupied, with the FHA deciding how to choose a specific percentage responsive to future market changes.

FHA Condo Community Approval Requirements

  • The condos must be complete or in its current phase of construction.
  • In communities with at least 10 units, up to 50% of the units can be FHA-insured. Only two units can be FHA-insured for communities with fewer than 10 units.
  • At least 50% of all units must be owner-occupied.
  • The condo association must keep at least 10% of the HOA budget in a cash reserve.
  • At least 85% of the units must be current on their condo dues, with limited exceptions for properties where a reserve study has been done.
  • A maximum of 35% of the property can be used for commercial purposes.
  • The community must be recertified every three years to meet the requirements.
  • Communities cannot be condos with several hotel-like amenities and rent units to vacationers or in undesirable areas, such as near a landfill or airport.

Spot Approvals

Single units in condo communities can also be FHA-approved separately. This is called a spot approval or spot loan, and mortgage companies award these single-unit approvals on a case-by-case basis.

The approval does not happen in a vacuum because the entire community must still meet certain guidelines.

The community must be financially stable, and common resources are considered part of the individual condo property value. Also, the borrower must have an initial FHA appraisal and recertification every 3 years to ensure continued compliance.

This can be especially challenging because the association must complete paperwork and many don’t want to be approved for FHA loans. Because the bar is relatively loan for FHA approval, many fellow owners may be concerned that owners won’t be able to afford maintenance and special assessments that occur over time.

Single-unit condos have different standards for FHA approval than entire communities. Some of these include:

  • The condo project has at least five single-dwelling units
  • The single unit is not a manufactured home
  • The unit is ready for occupancy. It cannot be under construction.

Also, only a certain number of condos can be FHA-financed in a non-FHA-approved building or development.

Qualifying for an FHA Condo

To qualify for an FHA-approved condo, you must meet the following requirements:

  • The condo must be considered a primary residence or a home you live in for the majority of the year.
  • Your credit score must be 500 or higher, but lenders may set their requirements, which can be higher.
  • FHA-insured loans require a 3.5% down payment if you have a credit score of 580 or higher. If your score is between 500 and 579, you must make a 10% down payment.
  • Most lenders require a debt-to-income ratio (DTI) of 43% or less but this can vary by lender and your credit score.
  • You must pay an FHA mortgage insurance premium (MIP) when you take out an FHA loan. There is an upfront MIP payment equal to 1.75% of the loan’s value. You’ll also pay an annual MIP that depends on your loan-to-value ratio (LTV), down payment amount, and mortgage term length.

Rule Changes That Favor Seniors

Rule changes in 2019 also made it easier for seniors who already own a condo to get reverse mortgages to supplement their retirement income.

According to estimates, the FHA reverse mortgage program accounts for 90% of all reverse mortgages. Seniors living in uncertified condo buildings who can’t obtain reverse mortgages have an easier chance for approval if their condo receives FHA approval.

The FHA Section 234(c) Low and Moderate Income Program

FHA insurance is important for low and moderate-income renters. Through the FHA Section 234(c) program, lenders are encouraged to extend affordable mortgage credit to low and moderate-income borrowers.

The Section 234(c) program insures a loan for 30 years to purchase a unit in a condominium building. The building must contain at least four units and can comprise detached and semidetached units, row houses, walkups, or an elevator structure.

This FHA loan insurance allows individuals to qualify who may have been denied a home loan by conventional underwriting guidelines in the past under conventional loan requirements. The FHA sets limits on the loan size that vary by location and the number of units being purchased.

Finding FHA-Approved Condominiums

You can find the FHA-approved condo list through the U.S. Department of Housing and Urban Development’s approval list website. You can search for approved communities or those that have been submitted and are awaiting approval.

You can also contact the condo association to see if a condo ID is available or if the application process has started.

It’s also a good idea to work with a real estate agent who is well-versed in FHA condo loans to guide you through specific requirements and restrictions.

Aaron Crowe

Aaron Crowe is a seasoned personal finance and real estate journalist. Aaron writes on real estate as it relates to mortgages, refinancing loans and lending for Refi.com.

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