Can I Buy a Condo with an FHA Loan? Everything You Need to Know

Buying your first home is an exciting milestone in life For many, a condo offers an affordable entry point into homeownership With an FHA loan, you can buy a condo with as little as 3.5% down payment. But not every condo qualifies for FHA financing. So, can you buy a condo with an FHA loan?

The short answer is yes, you can buy a condo with an FHA loan – if the condo development is FHA approved. The FHA has strict guidelines that condos must meet to qualify for FHA loans. From owner-occupancy ratios to budget requirements, the FHA approval process ensures the condo development is financially stable before backing loans there.

As a first-time homebuyer, navigating FHA condo rules can be confusing. But knowledge is power when it comes to achieving your dream of owning a home. In this article, I’ll walk through everything you need to know about buying a condo with FHA financing.

What are FHA Condo Requirements?

The Federal Housing Administration (FHA) insures lenders against losses on mortgages that meet their criteria. Because condos carry higher risks than standalone homes, the FHA has extra requirements for condo developments.

All condos must be on the FHA’s approved list before you can get an FHA loan. For a condo to gain FHA approval, the homeowners association (HOA) must submit an application outlining the development’s finances and operations.

Some key FHA condo requirements include:

• Owner-occupancy ratio – At least 50% of units must be owner-occupied as primary residences.

• Investor concentration – No more than 10% of units can be owned by a single entity.

• Budget reserves – At least 10% budgeted for replacement reserves.

• Delinquencies – No more than 15% of owners 60+ days late on HOA dues.

• Litigation – No major pending litigation or defects.

• Completion – All units and common elements must be 100% complete.

• Pre-sales – At least 70% of units in new constructions must be pre-sold.

These requirements ensure the condo development is financially stable before the FHA will insure mortgages. Buildings with high investor-ownership or delinquencies pose too much risk.

How Do Condos Get FHA Approval?

Gaining FHA approval is a detailed process orchestrated by the condo association or developer, not individual owners. Here are the general steps:

1. Review FHA requirements – The condo association reviews guidelines to ensure the property meets approval criteria.

2. Submit application – A management company or authorized representative completes and submits the condo approval application.

3. Provide supporting docs – Financial statements, meeting minutes, and other documents help support the application.

4. FHA reviews package – The FHA reviews the application and makes an approval determination in 2-3 months.

5. List property – Once approved, the condo is added to the FHA’s public list of approved developments.

6. Recertify regularly – Approval expires after 2 years, requiring regular recertification.

As you can see, FHA approval occurs at the condo development level, not individual units. The entire project must meet eligibility criteria.

How Do I Know if a Condo is FHA Approved?

The FHA maintains a searchable online database of all approved condo projects at https://entp.hud.gov/idapp/html/condlook.cfm. Buyers can search the database by state and condo name to verify FHA approval status.

There are three potential statuses:

• Approved – The condo is currently approved for FHA loans.

• Expired – The condo was previously approved but has not recertified within the last 2 years.

• Not Found – The condo does not appear to have current or past FHA approval.

Before making an offer, double check the database to ensure the condo has active FHA approval. Expired projects must be re-approved before obtaining FHA financing.

If a condo you’re interested in isn’t on the list, ask the sellers or real estate agent to confirm its status. Lack of approval doesn’t necessarily mean the condo won’t qualify – the HOA may simply need to complete the application.

What if My Condo isn’t Approved?

If your dream condo isn’t FHA approved, don’t despair. You still have options:

Ask the HOA to apply – If the condo meets eligibility criteria, ask the HOA to submit the FHA approval application package.

Consider alternatives – Explore conventional loans requiring less than 20% down through Fannie Mae or Freddie Mac programs.

Save a larger down payment – FHA loans allow down payments as low as 3.5%, but you may be able to put 10-20% down for a conventional loan.

Look for other units – Work with your real estate agent to find similar condos in the area that are already approved.

Apply for exceptions – Single-unit “site condos” don’t require project approval and may be eligible for exceptions.

With a bit of persistence and compromise, you can still achieve the dream of condo ownership, even if FHA approval isn’t possible. Don’t give up!

FHA Condo Financing Details

If you find an approved condo, congratulations! Now let’s look at some key details on obtaining an FHA loan:

Down payments – FHA loans require just 3.5% down. But if the condo lacks a 10-year warranty, 10% is needed.

Mortgage insurance – FHA loans require up-front and annual mortgage insurance premiums, adding costs.

Credit score – Minimum 580 credit score required, but scores of at least 620 get better rates.

Debt-to-income ratio – Your total debt payments, including the mortgage, can’t exceed 43% of income.

Loan limits – Vary by area but typically around $420,000 for single-family units. Lower for condos.

Seller contributions – Sellers can only cover 6% of purchase price for closing costs/prepaids.

Inspections – Appraisal and professional home inspection required.

Occupancy – Must move in within 60 days of closing and occupy for 1+ year.

Program fees – Up-front mortgage insurance fee of 1.75% of loan amount.

Monthly fees – Annual mortgage insurance premiums range from 0.45% – 1.05% of loan amount.

Interest rates – Around 0.25% higher than conventional mortgage rates.

Be sure to discuss all costs, restrictions, and eligibility with your lender when applying for an FHA pre-approval. While FHA loans offer low down payments, the added fees can impact affordability.

Finding the Best FHA Lender

Not all lenders offer FHA loans, and even among those who do, some are better choices than others. Here are tips for finding the optimal FHA mortgage lender:

• Search for FHA specialty lenders – Many mortgage brokers specifically focus on FHA and other government-backed loans. Their expertise can be invaluable.

• Compare interest rates – Rates can vary significantly, so shop around for the best deals. Look for lenders offering discounted origination fees or lender credits to offset costs.

• Ask about down payment help – Many lenders offer grants and low-interest second loans to assist with down payments and closing costs.

• Review lender reviews – Research online reviews and complaints to ascertain customer satisfaction levels.

• Compare mortgage insurance – Ask for sample rate sheets showing required mortgage insurance rates at different down payments and credit scores. This can greatly impact your payment.

• Check for condo approval expertise – Make sure the lender has extensive experience specifically with FHA condo project approvals. This expertise is crucial.

Taking the time to research lenders will pay dividends through a smoother approval process and better mortgage terms. A reputable FHA specialist is key to financing your condo purchase.

Buying an FHA Condo – The Bottom Line

Condos offer an affordable entry point into homeownership for first-time buyers. And with an FHA loan, you can buy a condo with just 3.5% down. But the condo must meet the FHA’s project eligibility guidelines before they’ll insure the mortgage.

The approval process occurs at the condo development level through an application submitted by the HOA. As a buyer, verify the property is listed as approved in the FHA database before proceeding. If not approved, work with the HOA to submit for approval or consider alternative options like conventional financing.

With proper planning and research, you can successfully buy a condo with F