Your Quick Guide To FHA-Approved Condos

Homeownership can be wonderful, but the high prices, inflated interest rates and additional responsibilities (from cleaning gutters to shoveling snow) make the prospect less attractive. Fortunately, FHA-approved condos provide an alternative path to purchasing affordable homes with a homeowners association to take care of the maintenance.

The purchase of an FHA-approved condo requires two factors: A borrower who meets the financial requirements for an FHA loan, and an individual condo or entire condo development that passes a review from the U.S. Department of Housing and Urban Development (HUD). Whether you’re the buyer or seller in a transaction for an FHA-approved condo, this guide can help you streamline the process and avoid approval limbo.

What Is An FHA-Approved Condo?

The Federal Housing Administration (FHA) is a government agency in the United States that operates under the Department of Housing and Urban Development (HUD). One of the FHA's key roles is to facilitate homeownership by providing affordable home loan options for borrowers experiencing difficulty qualifying for conventional mortgages.

An FHA-approved condominium refers to a condominium project or individual units within a project that meet the FHA's criteria for approval. These criteria include safety standards, the proportion of owners versus renters in the community and the number of units purchased. In addition, the borrower must satisfy certain financial stipulations.

In other words, FHA-approved condominiums meet the government's specific standards and requirements for approval. This approval is vital for borrowers using FHA mortgages to purchase a condominium. Without it, the home sale can't happen.

Can You Buy A Condo With An FHA Loan?

Buying a condo with an FHA loan is possible if the unit is on the FHA’s approved condo list and the borrower meets the loan criteria. FHA loan standards are more relaxed than conventional loans, helping borrowers in a broad economic range. To qualify, borrowers must have a credit score of at least 580, sufficient cash for at least a 3.5% down payment and a debt-to-income ratio (DTI) of 57% or lower.

Additionally, the borrower must pay closing costs ranging between 3% – 6% of the purchase price. However, borrowers can roll the closing costs into the mortgage, reducing the upfront financial burden. Doing so means you only need the down payment (3.5% of the purchase price) to buy the home. While this option increases your loan amount, it lowers the barrier to homeownership.

For these reasons, FHA loans help first-time home buyers and borrowers with lower incomes become homeowners. These loans also usually have low interest rates, reducing the monthly mortgage payment. Additionally, borrowers with a credit score below 580 can still qualify by putting down 10% at closing. Lastly, you can use FHA loans an unlimited amount of times. This way, you can use an FHA loan to buy a condo, whether it’s your first home purchase or you’re a seasoned homeowner looking to downsize.

Why Would A Condo Not Be FHA-Approved?

For a condo to be approved by the FHA, construction must be complete, and no more than half of the community’s units may be rentals. The majority of the purchased units must be owner-occupied.

Condos receive different treatment from other single-family homes because they exist as units within a single building or community under the management of a homeowners association (HOA). The unit’s condition and inhabitability depend on how well the HOA and the other residents care for the community.

Entire condo buildings and communities can earn FHA approval, meaning every unit is eligible for purchase with an FHA loan. The condo association can receive approval through the HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP). Developments that receive approval get a condo ID.

Condo communities must fulfill these requirements: 

• Condo construction is finished.
• The HOA insures the building. 
• The HOA consistently has 10% or more of its budget in cash reserves.
• Condo units are at least 35% owner-occupied. Renters can't comprise more than 50% of the condo residents. 
• 15% or less of the condo

Pros And Cons Of FHA-Approved Condo Loans

FHA-approved condo loans have both perks and pitfalls that are crucial to understand before moving forward with a purchase. Here’s a summarized list for reference:

Find Properties On The HUD FHA-Approved Condo List

Home buyers can find FHA-approved condos by working with a real estate agent or a REALTOR^®. These professionals are well versed in local real estate markets and the FHA-approved properties in your area. In addition, online resources can help, including The National Multiple Listing Service (NMLS) and the official HUD listing.

If you’re searching on HUD’s website, you can find approved condos in your area. The search page has multiple information fields you can fill out, and you can use them to narrow your search. For example, you can start your search by viewing properties in your state. You can also filter your search by county, city, ZIP code or approval status. Click "send" to view your search results.

The FHA Condo Approval Process

The FHA condo approval process involves several steps to complete:

1. The association must complete the paperwork for the HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP).

2. An FHA-appointed agent will come to the building to perform an appraisal to ensure minimum safety and living standards.

3. The FHA processes the request. The review usually takes 2 – 4 weeks, but the timeline can stretch further depending on the building’s age, how quickly the borrower and homeowners association submit their documents and any criteria violations.

4. Condo approval lasts for 3 years. As a result, HOAs must reapply every 3 years to maintain their approved status.

How To Get A Condo FHA-Approved

You can get a condo FHA-approved when the individual condo or the entire building fulfills the conditions for approval. Approval for condos and condo communities involves various criteria, including the finished construction of all units and at least 35% of the units being owner-occupied (see the bulleted list above for a full rundown).

Additionally, the borrower must meet the financial requirements for an FHA loan. Eligibility includes a credit score of 580, enough money for a 3.5% down payment and a DTI of up to 57% in some cases. Remember, credit scores from 500 to 579 don’t prevent eligibility, but borrowers will need to have a 10% down payment in these cases.

What To Know About FHA Condo Spot Approval

Because entire condo developments sometimes lack approval, new HUD rules for single-unit approval allow individual condos to qualify for FHA loans. If a condo community doesn’t have approval, your lender can communicate with the FHA to obtain single-unit approval. The unit must meet the following conditions:

• Be part of a development with at least five units (any units under construction don’t count).
• Can’t be a manufactured home.
• Active FHA loans make up no more than 10% of units in developments of 20 units or more. Developments with less than 20 units can have two units with active FHA loans.
• At least 50% of the units are owner-occupied instead of rentals.
• 35% or less of the community is commercial real estate.
• 15% or less of the condo units are more than 60 days behind their HOA payments.

How To Find Out If Your Condo Is FHA-Approved

If you want to check your condo’s FHA approval status before listing it for sale, the official online HUD listing can show you. Enter your address, hit “Send”, and you’ll see if the property is approved, rejected or expired. If your condo isn’t approved, you can contact your local HUD office to get the process going for spot approval or talk with your HOA about applying for the entire development.  

The Bottom Line: Yes, You Can Buy A Condo With An FHA Loan

The FHA plays a crucial role in making homeownership accessible by offering FHA-insured loans for single-family homes, including condos. Both the borrower and the condo must receive FHA approval for the purchase to take place. Home buyers seeking FHA-approved condos must meet the financial criteria to receive a loan, while condos must fulfill conditions regarding construction and occupancy to qualify.

To determine a condo's FHA approval status, individuals can check the official online HUD listing, which provides information on approval, rejection or expiration. Homeowners can explore options like spot approval or work with the homeowners association to initiate the approval process for the entire development.

Overall, understanding the FHA approval process is essential for buyers and condo owners looking to sell or refinance their properties. If you’re ready to buy an FHA-approved condo, connect with an agent today to start your journey.