FHA-approved condos come with lower down payments and less stringent credit requirements than conventional loans. But the not-so-good news is that FHA-approved condos may require homebuyers to go through some additional procedures.
So, what requirements must these condos meet in order to be FHA approved? And where should you look for available properties?
What is an FHA-approved condo?
An FHA condo is a residential property that meets specific U.S. Department of Housing and Urban Development (HUD) requirements to be purchased with an FHA loan. If you want to purchase a condominium with an FHA loan, you must choose from a list of condominiums that have been fully vetted by management.
Note: The FHA is not a mortgage lender; it provides mortgage insurance to approved banks and lenders. In turn, these lenders make loans to people who meet the insurance criteria. If a loan goes into default, the FHA must repay a portion of the loan to the bank or lender.
Types of condominiums that qualify for FHA approval include: at least two units; detached or semi-detached units; manufactured housing; townhouses; or walk-up, mid-rise, or high-rise units.
Because the FHA imposes fairly stringent requirements, buyers are usually limited to a smaller selection of properties. In order to be approved, interested communities must first submit a considerable amount of documentation. They must then be reviewed by the FHA, and any proposed improvements must be made and re-examined before the building is placed on the approved list.
The full list of FHA condo requirements is very dense this year, but here are some common requirements:
The property must be fully completed, not under construction.
No more than 35% of the property may be used as commercial space.
No more than 15% of the units may be more than 60 days delinquent.
No more than 50% of the units may be investor-owned or used as rentals.
At least 10% of the HOA's budgeted income must be applied to a cash reserve account.
The HOA must have sufficient reserve funds for basic repairs and replacements for at least the next two years.
Property must be properly insured.
The Board of Directors does not have the authority to approve or deny leases.
Other requirements include factors such as being located within reasonable proximity to major transportation routes and ensuring that all initial construction of the project is completed prior to approval. Essentially, these requirements ensure that the property is in good standing and desirable.
A realtor can help you find FHA-compliant condominiums in your area through the Multiple Listing Service.
You can also visit the HUD website to find FHA-approved apartments through its search function. Simply enter your state and county to see a list of eligible apartments.
However, it is not uncommon for properties to expire, and while they may appear on the list, you should still do your own research before settling on a condo. If you plan to use an FHA loan to purchase a home, call the listing agent to make sure the property is indeed FHA approved.
According to Brian Antonopoulos, an agent with Hughes Realty Group in Palm Beach, Florida, the most beneficial step in purchasing a condo through the FHA loan program is to speak with an approved lender.
"Most lenders," he says, "will have an up-to-date list of FHA-approved condos." Usually, this list is smaller, but that's always the best place to start," he says.
Lenders can also help you through the pre-approval process. That way, once you're ready to submit an offer on the property, you can provide the seller with proof that you can get financing.
You should also hire a realtor in your area who is experienced in dealing with this type of property. This broker will be familiar with the current FHA-approved condos in your area and can recommend the best property for you based on your unique needs.
