Want to buy a condo and benefit from the low down payments that come with FHA loans? 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 these FHA-approved condos can be difficult 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.
Can You Buy A Condo With An FHA Loan?
Yes, you can buy a condo with an FHA loan. But until 2019, buyers had to first find a condo building or development that had been approved by the FHA for this mortgage type.
That has changed, thanks to the FHA’s Condominium Project Approval Final Rule. This rule allows a certain number of individual condominium units to be eligible for FHA mortgage insurance, even if the FHA does not approve the entire condominium development or building.
When issuing this rule, the FHA stated that its goal is to increase homeownership by letting more buyers purchase condos with FHA loans.
An FHA loan, a mortgage insured by the Federal Housing Administration, is a popular choice for many home buyers because they require lower down payments. If your FICO® credit score is at least 580, you can qualify for an FHA loan with a down payment as low as 3.5% of your home’s final purchase price.
FHA loans typically require lower credit scores, too, largely because they are insured by the federal government, making them less risky products for lenders.
How To Find FHA-Approved Condos
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.
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.
You aren't required to fill in all the information fields on this search tool. But the more information you provide, the more specific your search results will be.
You can also ask your real estate agent for a list of FHA-approved condos in the neighborhoods in which you are searching.
How FHA Condo Approval Works
There are steps that the owners in condo buildings, or those seeking to buy individual condo units, must take to get their properties approved by the FHA.
Getting A Single Unit FHA Approved
If the building where you want to buy a condo is not FHA-approved, your lender can request approval for the individual condo you want to buy. Not all individual condo units, though, can qualify for FHA financing.
A unit must be located in a condominium project that is not already approved by the FHA, this development must have at least five condo units and it must already be completed, meaning that the units in condo buildings under construction are not eligible for FHA approval.
HUD also says that a unit can't be a manufactured home and that no more than 10% of the condo development's units can be financed with FHA loans. At least 50% of the total units in a condo development must be occupied by their owners, not renters or tenants. HUD rules say, too, that up to 35% of the condo development can be set aside for commercial uses such as shops and restaurants.
If you are 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.
Getting An Entire Condo Community FHA Approved
The homeowners association governing a condo project can apply for FHA approval for an entire development. To do this, the association must complete the HUD Review and Approval Process or Direct Endorsement Lender Review and Approval Process. If the development passes this review, it will receive a condo ID.
To qualify, condo developments must meet certain 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 more than 50% of units are occupied by renters, the project won't qualify for FHA financing
FHA Condo Requirements
If you’re interested in buying a condo with an FHA loan, you’ll need to meet certain requirements.
First, you’ll need a solid enough credit score to qualify. If you want to qualify for an FHA loan that requires a down payment of 3.5% of your condo unit’s final purchase price, you’ll need a FICO® credit score of at least 580. You can qualify for an FHA loan with a down payment of 10% of your home’s final purchase price with a FICO® Score of at least 500.
Not all lenders, though, will approve you for an FHA loan with credit scores that low. Some lenders might require that your credit score be 620 or higher before they’ll approve you for any mortgage, including an FHA loan.
Your down payment amount matters, too. The bigger your down payment, the lower your interest rate tends to be. If your FICO® credit score at least hits that 580 mark, you can put down as little as 3.5% of your home’s purchase price as a down payment.
Your debt-to-income ratio (DTI) is another key number. Your DTI measures how much of your gross monthly income your monthly debts consume. For an FHA loan, lenders want your monthly debts to equal no more than 43% of your gross monthly income.
The Pros And Cons Of FHA Loans For Condos
Buying a condo with an FHA loan comes with its own set of positives and negatives.
- Low down payments: 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.
- Can qualify with a weaker 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, though not all lenders will approve your application if your score is that low.
- 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.
- Upfront mortgage insurance premium: The biggest negative of an FHA loan is the required mortgage insurance premium, or MIP. All FHA borrowers must first pay an upfront MIP equal to 1.75% of the amount they are borrowing. If you are borrowing $270,000, that comes out to $4,725.
- Annual mortgage insurance premium: Borrowers must also pay a mortgage insurance premium once every year. This could vary, but typically, you'll pay 0.85% of your loan's original amount each year. For a $270,000 mortgage loan, which comes out to $2,295 a year.
- Not all condos qualify for FHA financing: It can be challenging in some markets for buyers to find condos that they can buy with an FHA loan.
Frequently Asked Questions About FHA Approved Condos
How long does it take to get my condo approved by the FHA?
This varies. If you are 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 that is not already approved by the FHA. The development must have at least five units and it must be completely built. No more than 10% of the units in a condo development can be financed with FHA loans and at least 50% of the total units must be occupied by their owners.
Why are some condos not FHA-approved?
The FHA does often not approve Condo units because they sit in a development in which the homeowners’ association has not yet requested FHA approval. In other cases, the development might not meet the requirements to become FHA-approved. Maybe the building is still under construction or maybe more than 50% of the units are occupied by renters.
How do I know if a condo is FHA-approved?
To condominiums that the FHA has already approved use the condo search tool from the U.S. Department of Housing and Urban Development.
The Bottom Line
It is possible to finance the purchase of a condo with an FHA loan. But this does require finding a unit that is either already approved by the FHA or requesting that your lender petition the agency for approval. This can take time and does not come with a guarantee of success.
As an alternative, you can research other types of home loans, including conventional loans not insured by any government agency, to finance a condo.