FHA Approved Condos: What To Look Out For

If you aim to build equity without the hassle of property maintenance, consider a condominium (condo) as your ideal home. Financing your condo with an FHA loan is a viable option. However, locating FHA-approved condos can pose a challenge. 

Let’s delve into some strategies and insights to assist you in securing your new abode.

Understanding FHA-Approved Condos

The Federal Housing Administration (FHA) operates under the U.S. Department of Housing and Urban Development (HUD), providing federal assistance to local agencies managing housing for low-income residents. FHA supports home loans for numerous Americans. An FHA loan is a mortgage insured and issued by an FHA-approved lender.

An FHA-approved condo is one that qualifies for FHA financing. To be eligible for FHA loans, a condo community or single unit must meet FHA loan criteria through an appraisal process. Upon approval, the community or unit receives a unique condo ID number. Previously, prior to 2019, the entire condo community had to seek approval. However, since the 2019 rule change, individual condo units can also gain approval.

Do Condo Communities Need To Be Approved For An FHA Loan?

Condominium communities aiming for FHA loan approval must undergo either the HUD Review and Approval Process (HRAP) or the Direct Endorsement Lender Review and Approval Process (DELRAP) with lenders. The approval timeframe varies based on the original structure of the condo complex. Older properties with unique features may experience longer approval times.

Upon successful completion of the HRAP or DELRAP process, the condo community is assigned a condo ID and submission number, designating it as eligible for FHA-insured loans.

Condo FHA-Approval Process

To gain FHA approval for a condominium community that is not yet approved, a borrower can kickstart the process by applying for a single unit. The approval process for an FHA-approved complex is more intricate compared to that of an FHA-approved house. Apart from the standard FHA appraisal safety measures, the financial sustainability of the condominium development is assessed as communal resources contribute to the overall property value.

For a condominium project to secure FHA loan approval, the complex must meet the following criteria:

• Financial assessment of the property
• Evaluation of the property’s physical condition
• Verification of any ongoing legal actionsDocumentation required:
• Proof of insurance coverage

Single-unit condominiums must meet distinct criteria for FHA approval, encompassing various requirements such as:

• All units are move-in ready (not in the construction phase).
• The condo development comprises a minimum of five detached housing units:
• Each unit is not prefabricated.

Requirements for FHA Condo Approval

To be eligible for an FHA-approved condominium, you must satisfy the specified borrower criteria.

• Credit Score: To qualify, your credit score should be 500 or above, though lenders could establish their own criteria. Rocket Mortgage® mandates a minimum credit score of 580.
• Down payment: FHA-insured loans mandate a 3.5% down payment for individuals with a credit score of 580 or above. Should your score fall between 500 and 579, a 10% down payment is required.
• Debt-to-Income Ratio (DTI): For an FHA loan, the DTI requirement usually varies based on your lender and credit score. Typically, most lenders look for a DTI of 43% or lower.
• FHA Mortgage Insurance Premium (MIP) is a mandatory cost when securing an FHA loan. It comprises an initial payment of 1.75% of the loan amount and an ongoing annual fee determined by factors like your loan-to-value ratio, down payment, and loan term.
• Primary residence refers to the condo that serves as your main home, where you reside for the majority of the year.

FHA Condo Approval Guidelines

Condominium FHA approvals entail restrictions aimed at endorsing communities and units that will uphold or enhance their value over time. Here are a few fundamental prerequisites:

• A minimum of 50% of all units must be owner-occupied.
• The condominium association must maintain at least 10% of the HOA budget as a cash reserve.
• At least 85% of the units must be up-to-date on their condo dues, with some exceptions for properties that have undergone a reserve study.
• No more than 35% of the property can be utilized for commercial purposes.
• Recertification of the community or individual unit must be done every three years to verify compliance with the requirements.
• The condominium must be completed, or at least finish its current construction phase, not merely proposed.
• For communities with a minimum of 10 units, up to 50% of the units can be FHA-insured. In communities with fewer than 10 units, only two units are eligible for FHA insurance.

Locating FHA-Approved Condominiums

To access the list of FHA-approved condos, visit HUD’s approval list website. Enter the specific state and county where you plan to buy a condo. You can explore pre-approved communities or those awaiting approval.

If you’ve already found your dream condo, verify its approval status on the HUD website. Reach out to the condo association to inquire about the condo ID and the application progress.

FHA-Approved Condos: The Advantages and Disadvantages

FHA loans offer borrowers greater flexibility compared to other loan types. Yet, financing a condo with an FHA loan does come with its drawbacks. Let’s review the advantages and disadvantages of using FHA loans for FHA-approved condos.

Advantages

• Government manages your loan instead of a private lender
• Flexible loan terms and reduced interest rates
• Requires lower down payments compared to other loan alternatives

Disadvantages

• The availability of FHA-approved condos for prospective buyers is limited.
• Mandatory upfront and annual MIP payments are necessary.
• FHA-approved condos must undergo recertification every 3 years.

Other Options for Condominium Loans

Discovering the ideal condo only to realize it lacks FHA loan approval can be disheartening. Consult your lender to explore alternative condo loan possibilities. Let’s delve into prevalent mortgage substitutes together.

• Conventional loans offer a mortgage solution allowing the purchase of a condo with just a 3% down payment. It’s important to note that opting for a conventional loan necessitates private mortgage insurance (PMI) for down payments below 20%.
• VA-approved condo loans: Eligible borrowers have the option to utilize a VA loan for purchasing a condo. It’s important to note that not all lenders accommodate this property type. Before applying, ensure to verify the borrower and property eligibility criteria with your lender.
• Condo financing through Fannie Mae and Freddie Mac: Consider financing a condominium with either the Fannie Mae HomeReady® or Freddie Mac Home Possible® loan programs. Meeting certain credit score, down payment, and other loan criteria is necessary to qualify for HomeReady® or Home Possible®.

FAQs For FHA-Approved Condo 

If you’re considering financing your condo purchase, an FHA loan might be the ideal choice for you. Curious about the FHA condo approval process? Let’s delve into some common FAQs together.

Why does a condo need to be approved for an FHA loan?

As FHA loans for condos are FHA-backed, the agency aims to ensure the community and units uphold their value. Despite FHA loans having borrower requirements that are more forgiving than other loan types, they carry a level of risk for the FHA. Consequently, due to this added risk, FHA-specific appraisals and recertification for FHA-approved condos are mandated by the FHA and HUD.

What other types of properties does the FHA approve?

Various properties eligible for purchase with an FHA loan are single-family homes, multifamily homes, and specified manufactured properties. With Rocket Mortgage, you can buy up to a four-unit property using an FHA loan. Remember, FHA loans are solely for financing primary residences, not for investment properties or second homes.

Key Takeaway: Should You Consider an FHA-Approved Condo?

Considering purchasing a condo? An FHA loan could be a fitting choice. These loans offer more flexible terms and lower down payments than other home loan options, especially beneficial for first-time buyers stepping into homeownership with an FHA-approved condo in mind.

Buying a home is a significant decision, so consulting with a lender or real estate professional to explore your options thoroughly is advisable. If you’re contemplating a mortgage, kickstart the approval process today.