FHA loans and condos are often the two things first-time homebuyers want. But do they go hand-in-hand? Even if you aren’t a first-time homebuyer, can you buy a condo with FHA financing?
The short answer is ‘yes,’ you can buy a condo with FHA financing. The longer answer is that you can buy a condo with an FHA loan, but you have to follow the strict requirements set by the FHA. Any loan program has stricter requirements when it comes to condos because they are ‘riskier’ than a single-family home.
Keep reading to learn what you need to secure FHA financing on a condo.
The Condo Must Have FHA Approval
Perhaps the largest hurdle to jump when buying a condo is getting FHA approval. This goes beyond what the lender will allow. The FHA must say that it’s okay for FHA borrowers to use FHA financing to buy a condo in that development.
Here’s what it takes for the FHA to approve a condo development:
- No more than 25% of the units in the development may be for commercial purposes
- One person (investor) cannot own more than 10% of the units
- A majority (85%) of homeowners in the development must be on time with their HOA dues
- At least half of the units must be primary residences
- The FHA must approve the association’s budget and financial status
- The association must not be involved in any litigation or have any pending litigation against them
- The development must have adequate property insurance
These are the FHA requirements in a nutshell. They look at each development on a case-by-case basis. Because when you buy a condo you buy more than your own unit, you buy into shared property with the other owners, the FHA needs to make sure the association has things under control. They need to know that one person doesn’t own a majority of the units or that the units aren’t mostly rented out or used as condotels.
The Easiest Way to Buy a Condo With FHA Financing
Do you want the easiest way to purchase a condo if you are an FHA borrower? Find a development that the FHA already approved. There are plenty of them throughout the United States. This way you cut down on the red tape and the time it takes to get to the closing.
HUD offers a list of FHA-approved condos on their website. You can make your search as narrow or as broad as you like. For example, you can search by ‘all states,’ but you can probably narrow your search down to at least the state you want to live, or even as narrow as a specific county. If you found a particular development you are interested in already, you can also search by condo name.
Your real estate agent can also be a valuable resource when helping you find an FHA-approved condo. Use a realtor that is familiar with using FHA financing on a condo for the best results. Real estate agents have early access to MLS listings, which the realtor can tell if the development has FHA approval or not.
Buying an Unapproved Condo
If you happen to fall in love with a condo that doesn’t have FHA approval yet, you are in for a longer ride. The development must get FHA approval in order for you to move forward with your financing. Keep in mind that the association isn’t obligated to request FHA approval – it’s up to the directors if they want to go through the approval process or not.
The condo development’s status will determine how long the process will take. If you happen to find a development that was once FHA approved, but has since let the approval expire (they have to keep renewing their approval), you may get by with a streamlined approval process if the approval expired within the last six months.
If the development’s approval expired more than six months ago or they never had approval, they must go through the process from scratch. This means proving all of the factors we stated above plus resolving any other issues that come up during the approval process. It can take as long as 4 – 6 weeks to get FHA approval.
Securing FHA Financing for Your Condo
The good news is, though, that the qualifications to get FHA financing for a condo are the same as if you were buying a single-family property. You need a 580 credit score, 31% maximum housing ratio, 41% maximum total debt ratio, and a 3.5% down payment.
Some lenders may require a few compensating factors to make up for the risk of default that a condo poses, but that’s not always the case. Lenders have to follow the FHA rules and then can add their own requirements on top of that – they call it a lender overlay. If you come across a lender that is especially tough on borrowers buying a condo, keep shopping around with other FHA lenders to find one that doesn’t have the overlays.
Buying a condo with FHA financing is not impossible, but it definitely requires a little more work. Finding a condo development that the FHA already approved is certainly the easiest way to go about it, but you can always request approval to see how the process goes for you.