FHA Loan Requirements for Condos – A Complete 2023 Guide

The Federal Housing Administration (FHA) offers attractive low down payment mortgage options for buying a condo FHA loans only require 35% down and have flexible credit score requirements. However, the FHA has strict condo project approval guidelines that the condo must meet to be eligible. This article will provide a complete overview of FHA condo requirements and approval process in 2023.

Overview of FHA Condo Loans

FHA loans are a popular mortgage option, especially for first-time homebuyers. Here are some key advantages of FHA loans:

• Low Down Payment – Only 3.5% down payment required on purchase. On a $300,000 home, this equals just $10,500.

• Flexible Credit – Minimum credit score is 580 for 3.5% down 500 for 10% down. Much more flexible than conventional loans.

• Low Mortgage Insurance – Upfront 1.75% fee of loan amount, plus 0.85% annual mortgage insurance. More affordable than conventional MI.

However, there are stricter approval guidelines for condos. The FHA needs to approve the condo complex before they will insure mortgages there. This ensures the condo project is financially stable.

FHA Condo Approval Process

For a condo to be eligible for FHA financing, the entire condo project must be approved. There are several steps in the condo approval process:

• Condo Project Application – The homeowners association, management company, or developer completes the condo approval application and submits project documents.

• FHA Review – The FHA reviews the condo project application and all submitted documents to verify it meets approval requirements.

• Condo Project Approval – If approved, the FHA notifies the applicant and adds the condo project to the list of FHA approved developments.

• Recertification – Approved projects must be recertified every 2 years to remain eligible.

This approval process must be done before individual unit owners can obtain FHA financing. It is not the responsibility of the borrower.

FHA Condo Approval Requirements

The FHA has certain requirements that condo projects must meet to gain approval. These include:

• Occupancy – No more than 35% of units can be investor-owned or rented out. At least 50% must be owner-occupied.

• Project Completion – The project must be 100% complete, including all units and common elements.

• Budget/Reserves – The project must have an adequate operating budget and at least 10% reserves for capital expenditures and deferred maintenance.

• Delinquencies – No more than 15% of unit owners can be more than 30 days delinquent on HOA dues.

• Ownership – The condo association must have control from developer and hold title to common areas.

• Insurance – The project must maintain proper hazard, liability, and fidelity insurance coverage.

• Litigation – No current or pending litigation involving safety, structural soundness, habitability, or functional use of the condo project.

Meeting all these requirements provides assurance to the FHA that the condo development is financially stable.

Streamlined Approvals

In some cases, condos may qualify for more streamlined approval based on outside oversight:

• Fannie Mae Approved – Condos on Fannie Mae’s approved list can get FHA approval by providing their project acceptance certification.

• Freddie Mac Approved – Same streamlined process for condos approved by Freddie Mac.

• VA Approved – Condos already approved by the VA can submit their approval letter for expedited FHA approval.

These streamlined approvals simplify the process since the condo has already passed similar project review and approval with conventional financing standards.

Owner-Occupancy Flexibility

In response to COVID-19, the FHA has implemented temporary flexibility on owner-occupancy requirements through December 31, 2023.

Normally, condo projects must be 50% owner-occupied to be eligible. But currently condos can qualify at just 35% owner-occupancy.

This temporary policy makes it easier for condos to gain FHA approval. Several condo projects that didn’t qualify before may now meet requirements.

Single-Unit Approval

If a condo project is not approved by the FHA, individual condo units may still qualify for what is called “Single-Unit Approval”. Here are the eligibility criteria:

• Condo project must have at least 5 units
• Property must be principal residence – no investment properties
• Condo project meets all FHA insurance and occupancy requirements

This option gives more flexibility. For example, a new condo development that hasn’t gone through full FHA approval could still potentially qualify for single-unit approval.

Using an FHA-Approved Condo Lender

The condo approval process can seem complicated. Working with a lender that specializes in FHA condo loans can help simplify the process.

These lenders have extensive experience submitting condo approval applications and guiding projects through the FHA review. They can also advise if a particular condo will qualify for streamlined approval.

Getting pre-approved by an FHA condo lender is a smart first step for buyers. The lender can inform you if the specific condo meets eligibility requirements.

Next Steps for FHA Condo Buyers

Purchasing an FHA-approved condo involves a few extra steps compared to other homes:

• Verify condo complex is on FHA approved list
• Get pre-approved by FHA-approved lender
• Submit offer contingent on condo approval if not yet cleared
• Proceed to closing once condo eligibility confirmed

The condo approval process may take some extra time. So buyers should account for this when making offers and estimating their closing timeline.

But the reward is worth the extra effort. FHA loans let buyers purchase a condo with as little as 3.5% down and flexible credit requirements. Just be sure to partner with a lender familiar with FHA condo guidelines. This will help navigate the approval process and timeline.

The Bottom Line

FHA condo loans allow buyers to purchase a condo with low down payment and more flexible credit. However, the condo must meet FHA project approval requirements before buyers can obtain FHA financing. The approval process examines the condo development’s finances, ownership, and occupancy percentage. Working with an experienced FHA lender can streamline the condo approval process. But buyers should still account for the extra time needed to complete condo approval when making an offer contingent on approval. Overall, FHA condo loans provide an affordable low down payment option for buyers – as long as you fully understand the approval guidelines.