FHA financing can help you buy a home with a low down payment. If you buy a condo, though, you’ll have to make sure it’s FHA approved. If it’s not, the process could be delayed. In some cases, you may not be able to secure financing at all. Find out why FHA approval is so important and why you should ask about it first.
Why Condos Must be FHA Approved
The FHA approves certain condo associations that meet their requirements. If an association doesn’t meet the FHA approved requirements, the FHA won’t guarantee the loan. In other words, you can’t get the loan. A lender can’t fund under the FHA name without meeting all requirements.
The requirements simply mean that the development and association meet the following rules:
- The development is mostly for residential use. No more than 25% of the development can be for commercial purposes.
- At least 50% of the units must be owner-occupied.
- One investor cannot own more than 10% of the units in the development.
- 85% of the homeowners must be on time with their association dues.
- The development must carry the property insurance including flood insurance.
- All financial documents must meet with FHA approval, including the budget.
- There cannot be any pending litigation against the development or association.
The FHA sets these rules because insuring a loan on a condo is risky. The value of the condo depends on more than what the individual owner does. If a majority of the condo owners default on their loans, the whole development will lose value. This could make it risky for the lenders holding loans on these properties. As more homeowners default on the loans, the FHA gets in over their head. With the condo approval rules, the FHA can prevent this from occurring.
Finding an FHA Approved Condo
It might sound difficult to find an FHA approved condo given all of the requirements, but there are steps you can take.
The easiest way is to check HUD’s website. They offer a current listing of approved condo developments. You can search as broad as by state or narrow it down to specific cities or even condo names. Before you get the ball rolling, though, find out from the association themselves if are still FHA approved. Some associations let their approval expire.
You can also use your real estate agent to find approved developments. The MLS listing shows real estate professionals the status of a development. This can help you narrow down your choices by avoiding those that don’t have current approval.
Obtaining Condo Approval
What if you fall in love with a condo that doesn’t have approval? Is FHA financing out of the question? Luckily, you have options. Unfortunately, they take time, though. FHA approval doesn’t happen overnight. The development must apply for approval. This requires them to submit a large amount of paperwork and satisfy many conditions.
If the development held FHA approval before and it expired within the last 6 months, they can apply for re-approval. This process takes less time than a full-blown approval. However, the development must act fast. They can’t use the streamlined process if more than 6 months has passed since the expiration. Developments can start the re-approval process up to 6 months before the approval expires.
Qualifying for an FHA Loan
Of course, it’s not enough for the condo to be approved by the FHA. You must meet FHA requirements as well. The basic FHA requirements are as follows:
- Minimum 580 credit score
- Maximum debt ratios of 31/43
- No unpaid collections
- At least 2 years have passed since a bankruptcy discharge date
- At least 3 years have passed since a foreclosure
- 5% down payment
These are the basic FHA rules. Lenders may add their own requirements on top of this, especially for a condo. Lenders are the ones putting up the money for the loan. If they see that you are a high risk, they may impose stricter guidelines to ensure that you don’t default on the loan.
Overall, it’s not hard to secure funding on a condo. If you use FHA financing, your first step should be to make sure it is FHA approved. This will make the process the easiest for you. If it’s not approved, you have options, but know that they may delay the process. Work closely with your real estate professional and/or lender to ensure that your process goes as smoothly as possible.