Compared to single-family homes, condos can be more affordable, which makes them an appealing choice for first-time homeowners.
When it comes to buying a condo with an FHA loan, however, things can get complicated, making it very difficult to qualify for an FHA loan.
What are the FHA loan requirements when buying a condo? How difficult is it to get approved for an FHA loan to finance a condo? These are just some of the most burning questions that I will answer in this article on all you need to know about condo FHA loan requirements.
But first, here’s why getting a condo with an FHA loan is difficult:
Condo Project Must be FHA Approved
Let’s assume that you’ve set your eyes on a condo you want to finance with an FHA loan, only to discover that it must be on the FHA’s approved list. If it’s not on your lender’s approved list, there’s no other way to get an FHA loan to finance it.
Indeed, your ability to get a condominium with an FHA loan is limited by the FHA list of approved condominiums.
Unfortunately, condominiums must meet a set of requirements to qualify for approval, and most condominiums fail to do so, therefore, your choices are very limited.
The approval process itself is also difficult and even costly, so most condominiums will choose against getting FHA approval, which means that the only way for a borrower to get a condo is with a conventional loan.
With a conventional loan, there are significantly less hoops to jump. Other than certain basic industry standards that must be met by the condominium project, there are no other requirements that would prevent you from getting a conventional loan for a condo.
On the other hand, FHA loans have a set of stringent requirements for condominium projects, and you won’t be able to get an FHA loan for a condo unless it’s specifically approved by the FHA.
This is bad news for those that were hoping to get FHA financing for a condo, especially that the average condominium cost less than the average single-family unit.
Once you understand the requirements imposed for condos by the FHA, you will also understand the difficulties encountered by condominium projects when seeking FHA approval.
What are the FHA Requirements for Condos?
In what follows, I will get you up to speed with the specific requirements that a condominium project must meet to get approved by the FHA:
Substantially Completed Project
This is a major reason why only few condominiums get approved by FHA. Even though developers would benefit from an FHA approval, especially if the condominium is in its early stages of development, the FHA prevents them from getting approval unless the project is substantially completed.
Substantial completion means that the housing units as well as the common area structures must be completed, and only minor works such as landscaping can be unfinished.
Another reason why a condominium mail fail to get FHA approved is insufficient or inadequate insurance.
The condominium association owns the common property within a project along with the physical structures of the housing units, while the owners of the single units own solely the interior of the unit from the walls in.
In this context, the FHA will have to review the master insurance of the condominium association and will analyze whether they have insurance for common hazards, liability insurance as well as other insurance related to the location or situation of the property (e.g. flood insurance).
Only if the condominium manages to meet the adequate insurance requirements of the FHA can they get approved.
Restriction on Individual Ownership
Since properties that can be bought with an FHA loan are by design for owner occupancy, the FHA will want to make sure that only a small fraction of the total units is owned by a single investor.
Therefore, as per the FHA’s requirements only 10% of the total units in the condominium may be owned by a single investor.
It’s also common for developers or builders to rent out unsold properties, and so the FHA wants to make sure that a significant proportion of the housing units are owner occupied.
Location of Condo
The FHA will also look at where the condominium project is located. In this context, it requires that the condo is within a reasonable distance from a well-traveled road, railroad, airport, or military airfield.
The condo cannot be located near a landfill or a dump, nor can it be constructed on unstable soil or other problematic site.
The owner occupancy rule of the FHA applies also to condominium properties and the FHA requires that at least 50% of the units are owner occupied or sold to owners that intend to occupy the property.
The FHA will also review the reserves of the condominium to make sure that the condominium can replace structures like sidewalks, roads, and others since they’re the owners of these physical structures. The review of the reserves must not be older than 12 months.
Homeowner’s Association Dues Payment
To ensure financial integrity and the ability to provide maintenance and adequate insurance coverage, the FHA mandates that no more than 15% of units can be behind their homeowner’s association dues payments.
The bylaws and covenants of the condominium will also be reviewed by the FHA. By doing so, they want to make sure that there are no infringements to the Fair Housing Act and that the bylaws do not affect a mortgagee’s right to foreclose on a unit.
Restriction on Resort Properties
The FHA prohibits condominiums that double as resort type properties (also known as “condotels”), therefore, the FHA wants to make sure that buyers purchase their units as primary residence.
Limited Commercial Use
The FHA is strict on its position that the property must be primarily residential in nature. A condominium, where more than 25% of the project’s total floor space is designated to commercial use (including office space or retail) will not get approved.
The requirements for condo FHA loans are rather substantial and it’s easy to see why most condominiums will not opt for an FHA approval.
Those that do, will get on the FHA list of approved condominiums, and you will be able to choose a condo from there. Be advised, however, that your options are limited to that FHA approved list.
Approval takes time, it’s costly, and it involves a lot of documentation along the way, so most condos will either not even bother with approval or they may get declined for approval.
What to Do if Condo Project is Not Approved?
Condo financing is very different from financing single-family homes, and chances are high that the condo of your choice is not FHA-approved for the various reasons discussed above.
However, if your dream condo hasn’t been FHA approved, there are a few other options:
One option is to look at the FHA approved list of condos and pick one from there. You might find something similar to what you were looking, and you might just as well sail through the whole FHA financing process without any additional hoops to jump.
If there are no condos that would work for you too, the other option is to opt for a conventional loan if you can qualify. Yes, you will need a good credit score and a higher down-payment, but you’ll also find it easier to finance whatever property you desire.
If conventional financing is not something you would qualify for (either because of a bruised credit or lack of enough down-payment funds), a further option would be to opt for a different type of property and finance it with an FHA loan.
If your credit score is unbruised and you can make a larger down-payment, going with a conventional loan is easier, especially if the condo project certifiably meets basic industry standards for lending purposes.
Of course, compared to FHA loans, conventional loans usually require a higher down-payment and a better credit score, making it harder for some borrowers to qualify.
Unfortunately, FHA requirements for condos interfere with your ability to secure an FHA loan for a condo. The variety of factors required for approval process are all out of your control.
If you’ve set your heart on buying a condo, there are really two options available to you: Choosing a unit from a condo project that’s on the pre-approved FHA list, or choosing conventional financing over FHA financing.
In fact, if you can make the higher down-payment required by conventional loans and you have a credit score that would qualify you for a conventional loan, you will be better off with this type of financing since you won’t need to pay the high monthly insurance premiums that are required with and FHA loan.
I hope that this article has cleared up the reasons why it’s difficult to buy a condo with an FHA loan and the many requirements condominium project must meet to qualify for an FHA approval.