Can You Buy a Condo with an FHA Loan?

An FHA loan is a popular option for first-time homebuyers and those with limited funds for a down payment. But can you use an FHA-insured mortgage to purchase a condominium? The answer is yes, with some caveats.

The Federal Housing Administration (FHA) does insure mortgages for condos, but there are additional requirements compared to financing single-family homes The condominium complex must gain FHA approval before you can obtain FHA financing to buy a unit there

Below we’ll explore the key facts about using FHA loans to buy condos. You’ll learn:

• What makes a condo eligible for FHA financing
• The process for getting a condo approved by FHA
• Special rules for new construction condo projects
• Owner-occupancy and pre-sale requirements
• Differences from conventional condo loans
• Steps to buying an FHA condo

Gaining an understanding of how FHA condo rules work is essential if you’re interested in low down payment financing for a condo purchase.

What Are the Basic Requirements for FHA Condo Approval?

The Federal Housing Administration sets guidelines for approving condominium complexes for FHA-insured mortgages. Here are some of the basic requirements:

• The condo development must be fully completed. For new constructions condos, a minimum of 70% of the units must have been pre-sold before closing with FHA mortgages can occur.

• No more than 25% of the total space can be used for non-residential purposes.

• Owner-occupancy minimums must be met. Currently, at least 50% of the units must be occupied by owners.

• No more than 15% of unit owners can be delinquent on HOA fee payments.

• The budget should include adequate funding for replacement reserves, insurance, and maintenance.

• The condo association must have an active homeowners association and hold regular meetings.

• There can be no pending litigation issues or major defects threatening the condo building’s financial viability.

On top of these baseline requirements, the condo complex must submit an application with supporting documents that’s approved by FHA. Getting on the FHA approved condo list provides blanket approval for all units.

How Does the FHA Condo Approval Process Work?

The condo homeowners association or developer takes responsibility for getting FHA approval for the entire condo project. This involves submitting documents that verify the condo meets all applicable FHA guidelines.

Exactly which documents are needed depends on the age and type of condo development:

For new construction condos: Documents including the site plans, floor plans, operating budget, and pre-sale agreements must be provided. Once construction is complete, occupancy permits and other proofs are required.

For existing condos: The condo association submits the declaration, budget, financials, meeting minutes, and occupancy documentation.

The approval processing time can range from a few weeks to several months depending on the complexity of the project. Once the condo is approved, FHA financing can be used to buy units there for up to 2 years before recertification is required.

So it’s not the buyer’s job to get FHA approval, but you do want to verify the condo you’re interested in appears on the FHA approved list before proceeding.

Special Rules for New Construction Condo Projects

FHA guidelines impose additional requirements for new construction condo developments where construction is not yet complete.

For unfinished projects, the developer must have pre-sold at least 70% of the units before FHA will agree to insure mortgages. Pre-sales are also required for existing projects with new construction phases.

Also, for new constructions condos, FHA requires all units to come with at least a 10-year warranty covering structural defects. This provides an added layer of insurance in case build quality issues emerge down the road.

If the project doesn’t have the 10-year warranty, the maximum FHA loan amount (LTV) is capped at 90% of the as-completed value. Otherwise, financing up to 96.5% LTV is possible.

What Are the FHA Condo Owner-Occupancy Requirements?

FHA wants to see condo developments with a healthy ratio of owner-occupied units vs. investor-owned units. This helps ensure the financial stability of the condo association.

Currently, FHA requires that at least 50% of the condo’s total units be occupied by owners living there. Units owned by investors who rent them out cannot be counted as owner-occupied.

The 50% owner-occupancy threshold promotes community engagement and proper maintenance. Temporary FHA provisions have allowed this percentage to go as low as 35%, but it will likely revert to 50% once the COVID-19 crisis subsides.

How Do FHA Condo Rules Differ from Conventional Loans?

The eligibility requirements for FHA condo approval differ in some ways from conventional mortgage standards for condos:

• Lower owner-occupancy percentage – FHA only requires 50% owner-occupancy, while conventional mortgages often mandate at least 70%.

• More flexible pre-sale requirements – FHA requires 70% of units pre-sold for new constructions while conventional loans typically want 90%.

• Potentially shorter approval timelines – the streamlined process can get an FHA condo approved in a few weeks compared to months for conventional approvals.

• Less stringent condo litigation rules – minor pending litigation is less likely to block FHA condo approval.

So in some ways, FHA condo rules are a bit more flexible than conventional mortgage guidelines. But you still need to verify the specific condo project is on the FHA approved list.

What Are the Steps to Buying an FHA Condo?

If you want to buy a condo using FHA financing, follow these steps:

• Research condos and ensure the one you pick appears on the FHA condo approval list

• Get pre-approved for an FHA loan to confirm you qualify based on your finances

• Make an offer on the chosen FHA condo once you find the perfect home

• Apply for FHA financing if your offer is accepted and submit required documentation

• Complete the closing process and take possession of your new FHA condo!

The condo approval part happens behind the scenes – you just need to stick to FHA properties on the approved registry.

The Bottom Line – Yes, You Can Buy a Condo with an FHA Loan

FHA financing is a viable and popular option for purchasing a condominium. As long as you select a condo on the FHA approved list, you can buy using an FHA loan with as little as 3.5% down.

The condo approval process provides checks and balances to ensure the condo project meets FHA standards for financial stability. While you don’t shoulder the approval burden, it’s essential you verify FHA condo status before proceeding.

If you need an affordable low down payment loan to buy a condo, an FHA mortgage can make owning a condo unit within your reach. Just be sure to target FHA approved condo complexes to avoid issues.