Can You Buy a Condo With an FHA Loan?

Buying a condo can be an affordable way to purchase a home, especially in high-cost areas. However, financing a condo purchase can be trickier than financing a single-family home. That’s because condos must meet certain requirements to qualify for a mortgage backed by the Federal Housing Administration (FHA).

So, can you buy a condo with an FHA loan? The short answer is yes, you can purchase a condo using FHA financing, provided the condo development is FHA approved. Here’s what you need to know about buying a condo with an FHA loan:

What are FHA Loans?

FHA loans are government-insured mortgages that allow buyers to purchase a home with as little as 3.5% down. These loans are popular among first-time homebuyers and buyers with lower credit scores because of their flexible credit guidelines and low down payment options.

To qualify for an FHA loan, you’ll need a minimum credit score of 580 for the lowest down payment option of 35% With a score between 500-579, you can qualify for an FHA loan with a minimum 10% down.

In addition to low down payments, FHA loans offer competitive interest rates. However, you will have to pay an upfront mortgage insurance premium and annual mortgage insurance for the life of the loan.

FHA Condo Approval Requirements

The FHA has stricter approval guidelines for condos versus single-family homes. This is because condos pose additional risks. For example if one owner in the condo complex defaults on their mortgage it could bring down property values for all units.

For a condo to be eligible for FHA financing, the entire condo community must meet the FHA’s requirements. The condo association or developer typically submits an application to get the condo community FHA certified.

Here are some key FHA condo approval requirements:

• Owner-occupancy – At least 50% of the condo units must be owner-occupied as a primary residence or second home. No more than 50% can be renter occupied.

• Pre-sales – For new construction, at least 70% of the condo units must be pre-sold before the FHA will insure mortgages.

• Delinquencies – No more than 15% of condo owners can be over 60 days delinquent on their condo fees.

• Reserves – The condo association must have at least 10% of its annual budget in reserves for capital expenditures and major repairs.

• Insurance – The condo development must maintain hazard, liability, flood, and fidelity insurance acceptable to the FHA.

• Litigation – The condo cannot be involved in any pending litigation issues.

• Defects – The condo cannot have any uncorrected physical defects or code violations.

• Budget – The condo must have an acceptable annual budget and adequate reserves.

The condo approval process can take anywhere from a few weeks to several months. Approvals are generally granted for 2 years before recertification is required.

Finding FHA Approved Condos

The U.S. Department of Housing and Urban Development (HUD) maintains a database of FHA approved condos on their website. You can search the list by state to see if a particular condo you’re interested in is currently approved.

There are a few exceptions where a condo may not need FHA approval:

• Single-unit condos – Also called site condos, these detached condos don’t require project approval.

• Two-to-four unit condos – Small condo projects may be exempt from certification requirements.

• VA or Fannie Mae approved – Condos already approved by these agencies can get expedited FHA approval.

When viewing certified condos, look for those approved within the last 2 years. Check with your lender to confirm the condo’s FHA status before making an offer.

Using an FHA Loan to Buy a Condo

If you find an FHA approved condo you want to buy, you can move forward with applying for an FHA mortgage. Here are some tips for using an FHA loan:

• Get pre-approved so you know your budget and can make competitive offers. FHA pre-approvals typically take 1-2 weeks.

• Make sure you have funds for the down payment and closing costs. You’ll need at least 3.5% of the purchase price for the down payment.

• Shop around with multiple lenders to find the best FHA mortgage rates and fees. Compare quotes apples-to-apples.

• Negotiate the seller’s credits or lender credits to cover your closing costs. This helps reduce upfront expenses.

• Know the FHA loan limits for your county. High-cost areas have higher limits up to $970,800.

• Be prepared to pay the upfront and annual mortgage insurance premiums required with FHA loans. This adds to your total costs.

• Understand the appraisal requirements. The condo itself must appraise for the purchase price.

With some preparation and research, an FHA loan can be a great financing option for purchasing an approved condo. Just be sure to work with an experienced lender familiar with FHA condo rules. This helps ensure a smooth transaction from start to finish.