Condos are highly in demand among home buyers as reported by the National Association of Realtors. In April 2023, the median existing condo sale price was $348,000, a rise of 0.7% from last year.
However, this median price is lower than the median home sales price of $388,000, making it more affordable than other property types. If you plan to buy a condo shortly, do it quickly to avoid paying a higher price later.
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But first, understand the concept of FHA-approved condos. Save more money by financing your condo purchase with an FHA loan.
🚀 Key Takeaways
- FHA loans require just 3.5% down payment: Unlike most other mortgage options, FHA loans need you to pay only 3.5% as down payment. You can save money and build equity.
- FHA-approved Condos have great resale value: When you sell your condo, you will get an impressive resale value because of the high demand. FHA approval is a great incentive for buyers as they can avail FHA financing.
- You have to buy Mortgage Insurance: If you want an FHA loan to buy a condo, you need mortgage insurance. The lender requires assurance of loan repayment. This is an added monthly expense for you.
- Your approval application may get rejected: FHA approval requirements for condos are very specific and extensive. Last year, around 14% applications were rejected because the buyers could not meet the requirements.
What Are FHA-Approved Condos?
FHA-approved condos are condo units or communities approved for financing by the Federal Housing Administration (FHA). The FHA certification means that the condo satisfies the eligibility requirements of FHA financing.
FHA appraises the property and gives it a unique identity number. After 2019, individual condo units can get approval from FHA even if the community is not FHA-approved. FHA financing is for first-time home buyers or people who haven’t owned property in the past three years.
You should be aware that some condo associations do not prefer home buyers with FHA financing. Due to the lower down payment for FHA loans, the association may feel that you are more likely to default in the future.
Why Does a Condo Need to be FHA-Approved?
Only if you apply for FHA financing for a condo purchase, the condo needs to be FHA-approved. The primary reason for FHA approval is that the agency needs to ensure the proper maintenance of the condo and community.
Additionally, an FHA loan has a lower credit score threshold and a 3.5% down payment requirement, much lower than conventional loans. Due to the added risk, FHA needs to appraise the property and certify that the property is worth lending money for.
What Type of Condo Will the FHA Approve?
The FHA has specific requirements that a condo unit and community must meet for approval. These requirements include a low percentage of renters, use of the property for residential purposes, structural adherence, and distance from hazards.
Keep in mind that FHA approval certification needs to be renewed every three years. Sometimes FHA gives approval to individual condo units instead of subjecting the entire community to the approval process.
How to Find FHA-Approved Condos?
If you are all set to purchase a condo, the easiest way to find FHA-approved condos is to check the HUD’s condominium database. You can enter the search term and get the FHA-approved condos list.
Alternatively, if you have a particular condo in mind and want to find out if it is FHA-approved, you can search for it and check its status. The search results contain information on condos at various stages of approval.
The list also contains condos with rejected or withdrawn applications. While looking for a particular condo unit, you need to feed the following details into the database:
- Condo Name
- Condo ID
- Status
- Date Range
If you do not have a specific name or ID, you can do a broad search and sort by city, county, or ZIP code.
Things to Notice While Searching for FHA-Approved Condominiums
You should carefully check the details of condos or projects during the FHA condo search process. Some of the things that you should notice are:
- Project Composition: Check out the ownership percentage of the units, number of commercial units, adherence to construction permits and codes, and amenities available.
- FHA-Approved Units: Find out the number of units that are already FHA-approved. The concentration of FHA units and the total units must be checked to see if the percentage is less than ten percent.
- Expiry of Approval: If the condo complex where you want to buy a condo shows “expired” status, you have to apply for single-unit approval. This takes more time than a unit of an already-approved development.
How to Buy FHA-Approved Condos?
The best part about buying FHA or HUD-approved condos is that your monthly payments are significantly less compared to other property types. Plus, the exterior maintenance of the property is covered by the HOA.
Here’s how you can buy an FHA-approved condo and avail these benefits:
- Check Your Eligibility: The first step is to see if you are eligible for an FHA loan. You need to meet certain requirements. You can select an FHA mortgage lender and ask them to help you to meet pre-approval requirements.
- Shortlist Condos: The next step is to look up FHA condo listings. Shortlist the properties that you like and check their approval status on the HUD website.
- Get Condo FHA Approval: If the condo unit you like is not FHA-approved, your mortgage lender can start the approval process. If it is already approved, you need to secure a loan to finance the purchase.
- Initiate Property Purchase: You need to approach the HOA of the condo complex where you want to purchase a unit. The HOA checks your mortgage details and other pertinent information.
- Secure Finance and Buy the Property: The last step is to get mortgage approval and buy the property by making a down payment. You must make monthly payments to repay the loan amount and HOA fees for property maintenance.
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FHA Loan Requirements
To get approval for an FHA loan for a condo purchase, you need to meet certain requirements:
- Credit Score: You need to have a minimum credit score of 500. If the score is between 500 and 579, you need to make a down payment of 10%. If it is above 580, the down payment is only 3.5%.
- Debt-to-Income Ratio: Your debt-to-income ratio should not be more than 43%. This debt includes mortgage payments along with taxes, association fees, and insurance costs.
- Mortgage Insurance: You need to purchase mortgage insurance which generally involves a 1.75% upfront premium and an annual renewal fee of 0.45% to 1%. The lender wants his loan to be secure.
- Primary Residence: The condo for which you want an FHA loan must be your primary residence for at least a year. Even if you purchase it for investment purposes, you need to live in it for the major part of the year.
Alternative Financing Options for Condos Not Approved by FHA
Just in case the FHA rejects your loan application, you need to keep alternative home financing options ready. Here are some condo loan options you can consider:
- USDA Loans: The U.S. Dept. of Agriculture offers mortgages for condominiums with no down payment and no minimum credit score. However, there are income and location restrictions. FHA, VA, Freddie Mac, or Fannie Mae’s approval is needed.
- VA Loans: If you are a veteran, you have the option to apply for a VA loan for a condo. The condo you want to finance with a VA loan should be VA-approved. VA loans do not have a minimum credit score or down payment requirements.
- Freddie Mac or Fannie Mae Loans: If your credit score is above 620 and you are within certain income limits, you can apply for a loan secured by Freddie Mac or Fannie Mae. It requires a 3% down payment, much lower than conventional loans.
How to Get a Condo FHA-Approved?
If you are opting for an FHA loan, you need to initiate the approval process in case the condo is not FHA-approved. Generally, the approval process for a condo is more complex than for a house.
Apart from the condo unit, the FHA checks if the community has adequate safety features and is financially viable. The communal resources add to the property’s value. Thus, maintaining these resources is essential to sustain the property value.
The condo owner or association needs to complete the required paperwork to start the approval process. They can either opt for the HUD Review and Approval Process (HRAP) or the Direct Endorsement Lender Review and Approval Process (DELRAP).
FHA Condos Approval Process for Single Unit
You need to meet the eligibility criteria for FHA financing. If you are eligible, your mortgage lender can apply for a case number for the condo you want to buy. After you acquire a case number, the lender can apply for single-unit FHA spot approval.
They give Form HUD 9991 to the HOA or the condominium management company. A representative fills up the questionnaire. The lender submits the filled-up form to the FHA. The final approval process generally takes three business days.
FHA Condos Approval Process for Entire Condo Community
The approval process for a condominium complex or community takes several months because the entire property and units must be inspected. The process is the same and it begins with HRAP or DELRAP.
After the review is complete and FHA approves the condo complex for financing, it receives a condo ID. Instead of a mortgage lender, it is the HOA that applies for FHA approval for the entire development.
FHA Condo Approval Requirements
A condo project must meet specific requirements to be eligible for FHA financing. These requirements ensure the project is financially stable and meets basic safety and liveability standards.
The requirements for FHA or HUD condo approval include the following:
- The condo should not have been certified in the past or the approval should have expired six months ago.
- At least 50% of owners must occupy the condo project.
- A single investor cannot own more than 10% of the units in the project.
- The condo association must maintain adequate insurance coverage.
- The project must comply with applicable zoning and building codes.
- The project must not have any pending litigation that could negatively impact the value or marketability of the units.
- The construction process should be complete in its current phase.
- In a community of at least 10 units, fifty percent of the units can get FHA approval.
- Only thirty-five percent of the condo units can be used commercially.
- Eight-five percent of the condo units must be current with payment of dues.
- Ten percent of the HOA budget must be kept as cash reserve by the association.
Cost of FHA Approval for Condos
Generally, the companies that assist with FHA approval for condos charge around $895. This includes a non-refundable down payment of $195 for an eligibility review.
You have to pay the remaining amount of $700 during the submission of the application. If you don’t get the approval, you don’t need to pay the submission fee.
Pros and Cons of FHA-Approved Condos
An FHA-approved condo has several advantages but a few drawbacks as well. Weigh the pros and cons before making a decision:
Pros
Buying an FHA-approved condo can have several benefits, including:
- More Accessible Financing: FHA-approved condos are eligible for FHA loans, which offer more flexible credit and income requirements and a lower down payment than conventional loans.
- Community Amenities: Condos that meet FHA approval requirements are likely to have well-maintained common areas and amenities, such as pools, fitness centers, and community rooms.
- Resale Value: FHA-approved condos may have higher resale values because they are eligible for FHA financing. The number of potential buyers can increase because of the incentive of FHA mortgage and you can get good offers.
Cons
Purchasing an FHA-approved condo may also have some potential drawbacks, including:
- Mortgage Insurance: Condos financed by FHA loans need to be covered by mortgage insurance because the owners make lesser down payments. This increases the owner’s monthly expenses.
- Limited Selection: The FHA doesn’t approve all condos because of specific approval requirements. This can limit the number of FHA-approved condos for you to choose from.
- Property Restrictions: FHA-approved houses may have restrictions on rentals or other property uses. It can restrict your flexibility as an owner in the future. Extra earnings from the property may not be possible.
Bottom Line
The best way to buy a condo is through an FHA mortgage because getting approval is easy compared to other loans if you meet the requirements. Your down payment and monthly payments are also considerably less.
Secure an FHA loan by taking the help of a certified mortgage lender. You can own a property and not even worry about its maintenance if you get FHA approval for a condo. Save money and gain equity at the same time!
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Also Read
- FHA Identity of Interest: Read to know more.
Frequently Asked Questions
1. Can you buy a condo with an FHA loan?
Yes, you can buy a single condo unit with an FHA loan if the unit or the community is approved by FHA. There are some requirements that the property needs to meet for approval.
2. How long does it take to get FHA approval for a condo?
On average, FHA approval for a condo takes two to four weeks. If you approach an FHA-approved mortgage lender, the process can get over faster as the paperwork is taken care of.
3. Why would a condo not be FHA-approved?
Condo projects may not get FHA approval if many units are rented, used for commercial purposes, or are not allowed to be investment properties. Insufficient reserve funds, failure to apply for FHA approval or certificate renewal, and inadequate insurance coverage may also be reasons.
4. What happens if a condo is not FHA-approved?
If a condo is not FHA-approved, the condo owner has to apply for approval to get an FHA-insured loan. If that is not possible, the owner must look for alternative condo loan options which generally require higher down payments and credit scores.
5. How often are FHA loans denied?
In 2022, the denial rate for FHA loans was 14.1%, the highest among all the loan categories. Thus, home buyers planning to finance their purchase with FHA-insured loans should go through FHA-approved lenders to ensure loan approval.
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