FHA-approved condos: Everything you need to know
Buying a home, especially as a first-time buyer, can be challenging. Condos, townhomes, PUDs — they all come with unique requirements. Luckily there are government institutions that help ease the burden and make home-buying more accessible. The Federal Housing Administration (FHA) is a government agency that offers FHA loans to eligible parties. FHA loans can be used on FHA-approved condos. These can be hard to find, but can be very beneficial to buyers like you. What does it mean for a condo to be FHA-approved? Let’s talk about everything you need to know before buying one of these condos.
What is the FHA?
The Federal Housing Administration is a government institution that was created to help more people afford housing via the help of FHA loans. It operates by insuring mortgages for FHA-approved lenders. This allows lenders to offer loans to borrowers who would traditionally be deemed too risky. They work underneath the Department of Housing and Urban Development (HUD). HUD distributes funds that help ensure safe and affordable housing for families all across the U.S.A.
What is an FHA condo?
Put simply, an FHA condo (also known as a HUD-approved condo) is a condominium that qualifies to be purchased with an FHA loan. It isn’t as simple as it sounds, though. In order to be eligible, you must meet specific loan guidelines determined by the Federal Housing Administration. Let’s talk about some of these requirements.
How to qualify for an FHA loan for a condo
The FHA sets certain terms for acquiring an FHA loan. These terms can be a bit more flexible since the Federal Housing Administration’s goal is to make home-buying more affordable for buyers. Don’t take that to mean it’s easy to get an FHA loan. Like any mortgage, there are several steps and rules to abide by. Some standard qualifications for an FHA loan are:
- Down payment options start at 3.5% (although, this depends on your credit score)
- Acceptable credit scores are 500 or greater
- 43% or less debt-to-income ratio
- Condo must be your primary residence
- Mortgage insurance is required (1.75% upfront; thereafter, an annual fee)
If you meet these terms and qualify for an FHA loan, you can look for an FHA-approved condo.
Condos: How to get FHA-approved
Just like you, the condo also needs to go through an approval process. In order for a condo to be eligible, it must meet the following rules:
- In condominiums with 10 units or more, up to 10% of the units can be backed by FHA loans.
- Only two units can be insured by FHA loans in condos with fewer than 10 units.
- 50% of total units needs to be owner-occupied (this means the person who holds the title uses the property as their primary residence).
- 85% of the residences must be current on any condo dues.
- All eligible condos must have reasonable insurance (speak with your lender to determine this rate).
- 10% of the Homeowner’s Association’s funds must be kept in a cash reserve.
- Commercial use of the property is limited to 35%.
All FHA-approved condos must also be recertified every three years. Single condo units can also be eligible for an FHA loan due to a process called single-unit approval. This means that the full condominium project does not have to be FHA certified, as was the case prior to 2019.
Benefits of FHA-approved condos
Compared to conventional loans, qualifications for FHA loans are much more flexible.
- There can be lower credit requirements and lower interest rates
- The entire down payment can be made from gift funds or other assistance programs
- You can pay as little as 3.5% in a down payment option, as long as your credit score is 580 (if it’s lower, you will need to put down more)
FHA-approved condos come with certain challenges
If you’re trying to avoid mortgage insurance, you may want to consider other options besides an FHA loan for a condo. Mortgage insurance is required on FHA-insured properties and it can’t be removed no matter how much equity you accumulate in the property. If you want to remove it, you will have to refinance into a different type of loan.
For insurance, there is an upfront fee of 1.75% and an annual fee that ranges from 0.45% to 1.05%. It is important to note that mortgage insurance premiums can be included in the loan amount.
The main challenge with an FHA condo is the amount of competition there is. HUD-approved condos are hard to come by, and while the Federal Housing Administration is trying to expand the numbers of available condos, currently bidding wars over units are very common. This can make finding your dream condo quite difficult. Let’s talk about how you can work toward finding an FHA condo that suits your needs.
Find your FHA-approved condo
Luckily for you and other home-buyers, HUD has created a tool that helps you see if the condo you’re looking at is FHA-eligible. It’s a lot easier than manually going down a checklist for every property you’re looking at. You can find this tool here.
You will need to fill out:
- Condo ID & Name
- Zip Code
The most important section to fill out, which can alter your entire search, is the “Status” section. The different selections can help you see different properties in your area and can help you see how to make them work in your favor. The options are:
- Approved: This shows all eligible condos in your area. These will most likely have the most competition.
- Rejected: These condos can still be submitted for single-unit approval. You will need your lender’s help with paperwork. Often, the issue can be resolved, making the property eligible.
- Expired: If it missed the three year recertification, it will expire and have to go through the full review process again.
- Withdrawn: These were previously approved, but for some reason, approval was withdrawn.
Alternatives to FHA-approved condos
If your dream property isn’t FHA-approved, there are other options. There are several types of loans that can help you afford your ideal property.
Fannie Mae HomeReady® mortgages
This type of loan requires as low as a 3% down payment option. There is a credit score minimum of 620 and requires private mortgage insurance (PMI), although it's offered at reduced costs. It also requires home ownership education for first-time buyers.
Fannie Mae 97% LTV
There is a 3% minimum down payment option on this loan. It is popular with first-time buyers. It has to be a 30-year maximum, fixed rate mortgage. It can be a condo among other styles of home. PMI is required. There are loan limits based on the county the property is in.
Freddie Mac Home Possible®
This is a good option for borrowers who might struggle to meet eligibility requirements on conventional mortgages. The minimum down payment option required is 3%. The down payment can come from flexible sources such as family help or assistance programs. PMI is required but can be canceled after you get enough equity. It can be used for a condo, PUD or manufactured home under certain restrictions.
Freddie Mac HomeOne® mortgages
This also has a minimum down payment option of 3%. This is exclusively available to first-time homebuyers. There are no geographic or income limits. Homebuyer education is required, as is PMI on LTVs over 95%. It is limited to one-unit condos and properties.
This is a second mortgage that you take out at the same time as your first mortgage, which then covers 10% of the purchase price. This loan type allows you to avoid PMI, usually.
Acquiring an FHA-approved condo can be intimidating. Just keep in mind that it’s no more challenging than other types of mortgages. It all depends on your situation. If you meet the qualification for an FHA loan, start browsing an FHA-approved condo list using HUD’s condo tool. You can find all eligible condos in your area matching your criteria. And if for some reason, you or the condo you’re looking at don’t match the qualifications, there are plenty of other loan types that might be better suited to you. For more information on qualifying for an FHA loan, visit here.
Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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