If you want to buy a home but the down payment requirements make this seem out of reach, there are more affordable options. Choosing an FHA-approved condo allows you an easier option to buy with lower credit and down payment requirements.
Changes to FHA condo approval rules now mean individual units can qualify even if the condominium development isn’t approved.
But if you want to buy a condo using an FHA loan, is there anything you can do if it isn’t on the condo approval list? We look at how to check if the condo is on the FHA-approved list and what you can do if it isn’t.
What is an FHA Approved Condo?
A condo or condominium is a unit in a larger development and is privately owned. Owners of these homes will own their individual units and have an interest in the development’s common areas.
A condominium association will manage and maintain the common areas, and owners will need to pay association fees for the upkeep of these areas.
Using an FHA loan to buy a condo means you don’t have to save for a large down payment, with 3.5% being the minimum.
FHA loans are also more flexible about credit scores, and you should benefit from fairly low-interest rates.
An FHA-approved condo has approval from HUD. Often the entire condo complex or just groups of condos are approved. If the complex is not approved, individual units can be.
For a condominium complex to be approved by HUD, it needs to meet certain requirements:
- The development needs to be in good condition
- There has to be sufficient insurance coverage
- The finances need to be well managed
- Information needs to be provided about ongoing lawsuits
Finding FHA-approved condos
If you are interested in a condo and want to use an FHA loan to buy, the property might already be on the FHA condo approval list. You can check this using the HUD’s database, fill out the address information and choose “Approved” from the status drop-down menu.
This database will also show if the condo has been rejected, withdrawn, or if approval has expired.
What to Look Out for When Searching for FHA-Approved Condominiums
Not every condo can be approved for an FHA loan. However, the database can give you important information to determine if it qualifies for FHA condo spot approval.
Expiration
If the status in the database shows “expired,” this could be a problem. The condo association has to provide current financial information and fill out the proper forms to maintain approval, if approval has expired, they haven’t been doing this.
Even if this is the case in the condo development you are interested in, you can apply for a spot approval.
While this can take more time than buying a condo in a development already approved, it will mean you have more control over the application.
Composition
The FHA has guidelines about the building and development phases and how many are owner-occupied. Investors can own a maximum of 65% of the units in the development.
With less than 35% owner-occupied, the FHA will not approve.
Concentration
There is a limit to the number of condos in the development that can have FHA loans. The database will show the FHA concentration of loans in the development, with 10% being the maximum.
In small developments of less than 10 units, a maximum of 2 can have FHA loans.
What can you do if a condo is not on the FHA-approved list?
While it was previously the case that the condo project had to be on the FHA-approved list, that was changed in 2019. HUD changed the rules allowing more flexibility, which now means that FHA loans can be used to purchase more condominiums.
The new rules now mean that individual condos can be approved through FHA condo spot approval when the development isn’t approved. However, certain requirements need to be met to win approval from the FHA:
- There must be at least 5 units in the development
- The units must be ready to live in
- Manufactured homes will not be approved
- At least half of the units must be occupied by the owners
- Only 10% of the units can be financed with FHA loans
- The condo development needs to be in good legal standing
Even if the condo does not qualify for FHA approval, other mortgage options might still allow you to buy the home.
Final thoughts
Whether you buy or sell, it is wise to have FHA approval for a condominium project. Getting FHA approval will make the homes more desirable and easier to market.
