Can You Buy a Condo With an FHA Loan?

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, youâll need to either buy in a condo development thatâs 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 canât find one in the neighborhood where you want to buy, youâll need to apply for a different type of mortgage loan to finance the purchase.

Buying your first home is an exciting milestone in life. If you’re looking to purchase a condominium (condo) you may be wondering if you can use a Federal Housing Administration (FHA) insured loan to finance it. The short answer is yes you can buy a condo with an FHA loan under certain conditions. In this article, we’ll explore everything you need to know about using FHA financing for a condo purchase.

What is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration FHA loans allow buyers to purchase a home with a low down payment, typically as little as 35% of the purchase price. These government-backed loans also have more flexible credit requirements than conventional mortgages.

To qualify for an FHA loan you’ll need a minimum credit score of 580 and a debt-to-income ratio below 43%. With an FHA mortgage you’ll pay an upfront mortgage insurance premium and an annual premium. But this can be an affordable route to homeownership for buyers with limited funds for a down payment.

FHA Condo Approval Process

The FHA has specific guidelines for condo developments. Before you can use FHA financing to buy a unit, the condo complex must be “FHA approved.” Here are two ways condos can gain FHA approval:

Entire condo community approval: The homeowners association can pursue approval for the entire condo complex through FHA’s approval process. Once approved, all units in that development would be eligible for FHA loans.
Single unit approval: If the condo community doesn’t have approval, your lender can seek case-by-case approval for the specific unit you want to buy.

For both processes, the condo must meet certain FHA requirements related to ownership, budget reserves, and more. Approval can take several weeks or longer.

Finding FHA-Approved Condos

Searching for an already-approved FHA condo will simplify the mortgage process. Here are some tips for finding eligible condo communities:

Check HUD’s online condo approval list for your state and county. This database lets you search for FHA-approved complexes.
Ask real estate agents to provide a list of FHA-approved condos in your area. Experienced agents will know which communities allow FHA financing.
Contact the homeowners association for any condo you’re interested in to ask about FHA approval status.
Review condo documents for mention of FHA approval or an associated project approval number.

Expanding your search area and being flexible on location can increase your odds of finding an FHA-approved condo.

Pros of FHA Loans for Condos

An FHA mortgage offers several benefits for financing a condo purchase:

Low down payment: You can buy a condo with as little as 3.5% down with an FHA loan. This helps buyers with limited funds.
More flexible credit requirements: FHA loans allow lower credit scores and higher debt-to-income ratios than conventional mortgages.
Lower monthly payments: FHA loans can offer lower interest rates, which reduces monthly payments and improves affordability.
Deferred student loans allowed: FHA guidelines let you exclude deferred student loans from your debt-to-income ratio calculations.
Lower closing costs: FHA loans allow sellers to contribute up to 6% of the purchase price to help cover your closing costs and prepaids.

For first-time buyers or those with limited down payment funds, an FHA loan can make condo ownership more attainable.

Cons of FHA Loans for Condos

However, there are some potential drawbacks to financing a condo purchase with an FHA loan:

Upfront MIP: You’ll have to pay an upfront mortgage insurance premium equal to 1.75% of the loan amount. This adds to your out-of-pocket costs.
Annual MIP: FHA loans also require annual mortgage insurance premiums that add to your monthly payments.
Condo supply challenges: Only units in FHA-approved condo projects can get FHA financing. In some areas, finding approved condos can be difficult.
Condo recertification: FHA-approved condos must be recertified every 3 years to remain eligible, which can be an administrative hassle.
Tighter resale restrictions: FHA guidelines prohibit certain types of condo resale restrictions that limit the pool of potential buyers.

Condo Loan Alternatives

If you can’t find an FHA-approved condo or want to avoid the drawbacks, you may consider the following alternative mortgage options:

Conventional 97 mortgage: Requires just 3% down with private mortgage insurance. Credit standards are a bit stricter.
VA loan: For eligible borrowers, allows 0% down payment with no monthly mortgage insurance. Limited to VA-approved condos.
USDA loan: 100% financing available in designated rural areas. Offers affordable rates and fees. Income limits apply.
Conventional low down payment options: Several programs like HomeReady and Home Possible allow 3% down with looser credit requirements than a standard conventional loan.
Bank portfolio loan: Check local banks and credit unions for portfolio loan products that may offer low down payments.
Down payment assistance programs: State and local groups often offer grants and low-interest second loans to cover your down payment and closing costs.

Tips for Buying an FHA Condo

If you want to buy a condo with FHA financing, keep these tips in mind:

Be prepared for a longer purchase process due to condo approval requirements. Build in extra time.
Get pre-approved to confirm you meet FHA loan requirements before you start shopping.
Be flexible on condo location if possible. Cast a wider net in your search area.
Ask sellers to select an FHA-approved lender and pay for condo approval upfront to attract offers.
Review condo documents thoroughly to ensure compliance with FHA guidelines.
Enlist a real estate agent familiar with FHA condo rules to guide you and identify any red flags.

The Bottom Line

Yes, it is possible to purchase a condominium with an FHA loan, provided the condo development has FHA approval. These government-backed mortgages offer affordable low down payment options but do come with some tradeoffs. If you’re set on an FHA loan, be prepared for a more limited condo search. For flexibility, also consider alternative mortgages. Discuss your specific situation with a lender to map out the best route to condo ownership.

How long does it take to get my condo approved by the FHA?

This varies. If youâre 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.

Buying a Condo | FHA Loans | Should you buy a condo??

FAQ

Why do condos not accept FHA loans?

A condominium project may not be FHA approved if they do not meet the restrictions and eligibility requirements. While FHA loans have more lenient borrower requirements, the condo property requirements are stricter.

What is a FHA approved condo?

FHA loans are insured by the Federal Housing Administration. They’re meant for first-time homebuyers or those who haven’t owned property in the last three years. An FHA-approved condo is a condominium that is eligible to be purchased with an FHA loan.

Is it harder to get a mortgage for a condo?

Financing a non-warrantable condo will likely be more difficult, as you won’t be able to access the low-down-payment options offered by some traditional mortgage programs and you’ll be limited to a smaller pool of potential lenders.

Does a condo have to be FHA approved for a reverse mortgage?

If you decide to take out a reverse mortgage on your condo, there are a few things you should consider: Eligibility: In addition to having an FHA-approved condo and being at least 62 years old, you must have enough equity in your home to qualify for a reverse mortgage.