FHA-Approved Condos: What They Are And How To Find Them
An FHA loan, a mortgage insured by the Federal Housing Administration, is a popular choice for many home buyers because of its low down payment and modest credit score requirements. If you want to buy a condo and benefit from the low down payment that comes with an FHA loan, you’ll need to either buy in a condo development that’s already been approved by the Federal Housing Administration or request approval for the individual unit you want to purchase.
The challenge is that FHA-approved condos can be hard to find. And if you can’t find one in the neighborhood where you want to buy, you’ll need to apply for a different type of mortgage loan to finance the purchase.
Let’s take a closer look at how the process of securing an FHA-approved condo works.
Can You Buy A Condo With An FHA Loan?
These days, you can buy a condo with an FHA loan. Before 2019, however, buyers had to first find a condo building or development that had been approved by the FHA for this mortgage type.
Thanks to the FHA’s Condominium Project Approval Final Rule, the requirements are no longer as rigid. This rule allows a certain number of individual condominium units to be eligible for FHA mortgage insurance, even if the FHA doesn’t approve the entire condominium development or building.
When issuing this rule, the FHA said its goal is to increase homeownership by letting more buyers purchase condos with an FHA loan.
How To Find The FHA Condo Approval List
The best way to find condominiums that the FHA has already approved is by using the condo search tool from the U.S. Department of Housing and Urban Development (HUD).
With this tool, you can enter the state and county where you’re searching for a condo. You can also enter the city, ZIP code or condo building name. Once you click the “send” button, a list of FHA-approved condos will appear on your screen. The more information you provide, the more specific the search results will be.
You can also ask your real estate agent for a list of FHA-approved condos in the neighborhoods where you’re searching.
How To Get A Condo FHA-Approved
Owners in condo buildings, or those seeking to buy individual condo units, must take certain steps to get their properties approved by the FHA.
FHA-Approved Single Unit Condo
If the building where you want to buy a condo isn’t FHA-approved, your lender can request approval for the individual condo you want to buy. Not all individual condo units, though, will qualify for FHA financing. To qualify for an FHA loan, a condo unit is required to meet a few conditions:
- It must be located in a condominium project that’s not already approved by the FHA.
- It must be in a development with at least five condo units. Units in condo buildings that are under construction aren’t eligible for FHA approval.
- The condo unit can’t be a manufactured home.
In addition, the condo community must meet the following criteria:
- No more than 10% of the condo development’s units can be financed with FHA loans by a single entity.
- At least 50% of the total units in a condo development must be occupied by their owners, not renters or tenants.
- No more than 35% of the condo development can be set aside for commercial use, such as shopping and dining.
If you’re buying a condo with an FHA loan, your lender will handle the process of requesting FHA approval. They’ll submit HUD Form 9991 to the condo development’s management company or homeowners association (HOA).
FHA-Approved Condo Community
The condo association can apply for an entire development to get FHA approval. To do this, the association must complete the HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP). If the development passes the respective review, it will receive a condo ID.
To qualify, condo developments must meet these specific requirements:
- The condo development must be completed. Developments still under construction won’t qualify for FHA financing.
- The property must have insurance coverage.
- The homeowners association must keep at least 10% of its budget in reserve.
- At least 50% of the development’s units must be occupied by their owners. If renters occupy more than 50% of units, the project won’t qualify for FHA financing.
FHA Condo Approval Requirements
If you’re interested in buying a condo with an FHA loan, your credit score, down payment and debt-to-income ratio (DTI) will all play a role in whether you’re able to secure the funding to move forward.
- Credit score: First, you’ll need a solid enough credit score to qualify. If you want to qualify for an FHA loan and have a down payment of just 3.5% of your condo unit’s final purchase price, you’ll need a credit score of at least 580.
- Down payment: Your down payment amount matters, too. The bigger your down payment, the lower your interest rate tends to be.
- DTI: Your DTI is another key number. It measures how much of your gross monthly income your monthly debts consume. For an FHA loan, lenders typically want your monthly debts to equal no more than 43% of your gross monthly income. It’s possible in some instances, however, to have a higher DTI and still qualify for an FHA loan.
The Pros And Cons Of FHA Loans For Condos
Buying a condo with an FHA loan, not surprisingly, comes with both some positives and negatives.
Pros Of FHA Loans For Condos
- A low down payment: The ability to take out a loan with a down payment as low as 3.5% of your condo unit’s purchase price is a nice perk for buyers looking to preserve their savings.
- The potential to qualify with a not-so-great credit score: You can qualify for an FHA loan even if your credit isn’t perfect. The minimum credit score the FHA requires is 500, but not all lenders will approve your application with a score that low. At the very least, a score under 580 will require a 10% down payment rather than the 3.5% down payment available to FHA borrowers with a credit score of 580 or above.
- Higher seller contributions: Sellers can pay up to 6% of the closing costs that buyers face when taking out an FHA loan. This can reduce the amount of money you need to bring to the closing table.
Cons Of FHA Loans For Condos
- An upfront mortgage insurance premium (MIP): Perhaps the biggest negative of an FHA loan is the required upfront mortgage insurance premium (MIP). All FHA borrowers must pay an upfront MIP equal to 1.75% of the amount they’re borrowing.
- An annual mortgage insurance premium (MIP): FHA borrowers are also responsible for an annual mortgage insurance premium that’s broken down into monthly installments and tacked onto each month’s mortgage payment. If you’re a new or recent FHA borrower, you’ll most likely pay 0.55% of your loan’s original amount in annual MIP obligations.
- Condos possibly not qualifying for FHA financing: It can be challenging in some markets for buyers to find condos that they can buy with an FHA loan.
FAQs: FHA-Approved Condos
Let’s take a look at a few frequently asked questions about FHA-approved condos.
How long does it take to get my condo approved by the FHA?
This varies. If you’re buying a condo unit in a development not approved by the FHA, your lender will request that HUD approve the individual unit. This process can take 2 weeks to a month.
What are the requirements to get a condo FHA-approved?
To qualify for FHA financing, an individual unit must be in a condominium project not already approved by the FHA. The development must have at least five units and be completely built. No more than 10% of the units in a condo development can be financed with FHA loans by a single entity, and at least 50% of the total units must be occupied by their owners.
Why would a condo not be FHA-approved?
The FHA may not approve some condo units because they sit in a development for which the HOA hasn’t yet requested FHA approval. It’s also possible the development might not meet the requirements to become FHA-approved, the building is still under construction or more than 50% of the units are occupied by renters.
How do I know if a condo is FHA-approved?
To find FHA-approved condos, use the condo search tool from the U.S. Department of Housing and Urban Development.
The Bottom Line
It’s possible to finance the purchase of a condo with an FHA loan, but this requires finding an FHA-approved unit or requesting that your lender petition the agency for approval. The latter can take time and doesn’t come with a guarantee of success.
If you’re getting a mortgage for a condo or other type of home and want to see if an FHA loan is right for you, we make it easy to apply for a mortgage online. Fill out your application today and discuss your options with a Home Loan Expert.