FHA home loans offer many benefits, and they’re designed to make homeownership accessible to more homebuyers. Consider: You can put as little as 3.5% down with a credit score as low as 580, have a debt-to-income ratio of as high as 50%, and there are no income limits.
FHA loans also tend to have lower interest rates than conventional mortgages, thanks to backing from the Federal Housing Administration (FHA).
But FHA loans aren’t for everyone, and finding a home that can be financed with one isn’t always a walk in the park. Some properties are not FHA-eligible.
If you’re in the market for a condominium, however, you’ll have to do some extra legwork to find FHA-approved condos because not all condo associations or homeowners associations (HOAs) choose to get FHA approval for the complex.
You might be wondering, why does the FHA need to approve condominium projects at all? Isn’t it enough that you’ll have to get your condo appraised before you can buy it?
“The reason that the FHA has to approve a condo property is multifold,” said Jammie Jelks, a member of the Forbes Real Estate Council in Atlanta. “The FHA wants to confirm how many units the development will have, that at least 50% of the units are owner-occupied, that the homeowners association (HOA) has adequate insurance coverage and assets, that more than 85% of the people in the project are paying their HOA dues, and that no more than 35% of the property is being used as commercial space.”
Put a simpler way, lenders have concerns with attached housing like condo buildings and attached home developments.
Unlike stand-alone houses, the value of a condo depends on more than the individual owner. It’s also affected by common areas and how well the entire complex is managed and maintained by the HOA.
If an HOA doesn’t invest in the property’s upkeep or make significant repairs as needed, the value of the condo units could drop. The same can happen if the HOA fails to properly care for common areas, such as community pools or trails. A dirty, unsanitary pool isn’t going to help the value of the project’s condos, no matter how meticulous the individual owners of those units may be.
Since the FHA insures the loans, it doesn’t want to lose money on properties likely to fall into disrepair.
Condos can be higher-risk
“Historically, attached housing is more difficult to sell in an economic downturn and has a higher risk of default,” said Bruce Ailion, an Atlanta-based attorney and Realtor®. “Often, investors purchase these moderately priced units and rent them out. As absentee owners, investors take less care of the condition of the property than owners would.”
Ailion added, “Lenders are also concerned that the HOA has funds to carry on the affairs of ownership, so having a minimum number of unit owners delinquent in dues is an important condition that must be met.”
Related reading: FHA Loan Requirements 2021 | Rates & Eligibility
Given the FHA’s concerns — that the HOA manages its finances and properties well — you might wonder why condo owners wouldn’t want to get FHA-approved. After all, wouldn’t that verification make the community more attractive to condo buyers?
Perhaps. But a condominium association can make assurances to potential buyers even without the FHA’s stamp of approval, and from their perspective, that can mean avoiding a lot of red tape.
Fact is, many condominium developments opt out of the FHA program due to the extensive rules that the U.S. Department of Housing and Urban Development (HUD) (which oversees the FHA) makes them adhere to.
Per the FHA, eligible condominium properties include:
- New construction developments
- Condo conversions
- Two- to four-unit condo projects
- Manufactured housing
- Leasehold interests
- Properties that have undergone significant restoration projects (gut and non-gut rehabs)
Condo properties that are NOT eligible include:
- Those with cooperative ownership
- Condo hotels or condotels
- Properties with mandatory rental pooling agreements that require unit owners to either rent their units or give the condo management firm control over unit occupancy
- Multi-dwelling condos (more than one dwelling per condo unit)
- Houseboat projects
- Continuing care facilities
The condo development must be primarily residential in nature, meaning not intended to be used as a hotel. It can only consist of single-family dwelling units, and it must comply with all applicable federal, state, and local zoning, fair housing, and accessibility laws.
Owner-occupancy and other requirements
The FHA also also has owner-occupancy requirements — meaning that a certain percentage of units must be occupied by their owners, as opposed to rental tenants. The percentages depend on when the project was built.
Darren Robertson, Realtor® and team leader with Robertson Residential Group in Arlington, Va., noted that the HOA or condo association also has to meet strict requirements for FHA approval.
The condo may not include:
- Current litigation against the condo association
- Any commercial space in the building
- More than a certain percentage of unit owners who owe delinquent condo fees
Additionally, the condo association has to maintain insurance levels that meet FHA, Fannie Mae, and Freddie Mac requirements, and it must maintain at least 10% of the annual HOA budget and cash reserves at all times, according to Jelks.
So, the bar is high for FHA-approved condos.
Pros and cons of FHA-approved condos
“It takes a great amount of the autonomy away from the condo association when they have to conform to FHA rules. Plus, it’s expensive to obtain and expensive to keep renewing an FHA approval,” said Eric Nerhood, owner and president of Orange County, Calif.-headquartered Premier Property Buyers.
“FHA approval must be renewed,” says Nerhood, “and that expense is a bit too high for most condo associations to justify with their owners due to all the rules that have to be followed.”
Granted, once a condo building becomes FHA approved, it’s easier for new buyers to obtain low-cost FHA mortgages, which can increase the opportunity for single-unit condos to be sold sooner.
“But many condo associations feel that this possible perk doesn’t justify the strict rules they have to abide by to get FHA certification,” Nerhood said, adding that FHA approval must be obtained by either the developer, HOA/condo association, or the managing agent of the condominium property.
Additionally, Nerhood explained that the condo development usually must be under 12 months old when the FHA application is made, and it must be accompanied by a myriad of paperwork and plot plans, including a letter from the state’s historical society indicating that the building meets its approval.
Because of the strict approval criteria, along with the annual recertification requirement, some HOAs opt against FHA approval.
If you want to buy a condo with an FHA loan, you have two options. The first is to find a condo located in an FHA-approved condominium project.
You can look up approved condo communities through HUD’s database.
The second is to apply for FHA single-unit approval (SUA). The SUA process enables some borrowers to qualify for an FHA loan even if their preferred condo isn’t in an approved project.
There are limitations to SUA. It applies only to existing construction, not new condo projects, and the community must have at least five units. The FHA also requires that no more than 10% of the project’s units be financed with FHA loans.
Still, if you’ve got your heart set on a particular condo, it’s worth talking to your lender about SUA. They’ll submit the application on your behalf and will coordinate the process with the HOA and the FHA.
But if you’re in a hurry to move, this probably isn’t the right move. The FHA typically takes three business days to review SUA applications, but your lender can’t apply until they’ve gotten all of the relevant information from your HOA. The timeline is out of your hands, and delays could push back your closing.
If a condo you are eyeing has been FHA approved, the process of getting an FHA loan is simple.
But if it hasn’t been FHA-approved, your mortgage lender won’t be able to process the loan – except in certain circumstances where the condo association knows its community meets FHA requirements and the association is open to fast-tracking the new approval process.
“In these circumstances, your FHA loan might be delayed. If so, it’s probably better to find another property that has been FHA-approved,” Robertson said.
Note that other types of attached homes with HOAs, including townhomes and duplexes, do not require FHA approval. So you might want to think about a different kind of attached property than a condominium.
Or, you can pursue other forms of mortgage financing.
Conventional loan financing
“There are 3% conventional loan options available now as well as zero down loan options for those who qualify, so it’s usually best to shop around for different types of financing,” Robertson suggested.
But, typically, you need better credit and income to qualify for conventional loans. So this isn’t always an option, either.
But it’s still worth applying for conventional. In fact, attempting to purchase a condo via an FHA loan in the current strong seller’s market could leave you without an accepted offer anyway.
“There is currently a stigma on FHA buyers. Some sellers believe buyers who use FHA are on a tight budget and can’t really afford to buy – even though that’s not really the case,” Jelks said.
“FHA loans are great. But in competitive markets with lots of multiple offer situations, sellers and listing agents will usually choose offers that have conventional loans over FHA loan offers. Talk with your lender about the different kinds of loans you may qualify for and weigh the pros and cons of each type of loan from a financial perspective,” he advised.
Related reading: 17 FHA Loan Myths Busted: Real Talk on the Pros and Cons
FHA condo FAQs
Yes, an FHA loan can be used to purchase a condominium unit. However, the condo building/development must be FHA-approved.
For a condo development and condo association to receive FHA approval, it has to apply for approval and demonstrate that it has adhered to numerous requirements mandated by the FHA. For example, the condo development must be primarily residential in nature and not intended for rental purposes, contain only single-family dwelling units, and maintain an acceptable percentage of owner-occupants. The condo association also must have adequate cash reserves, prevent condo fee payment delinquency, maintain sufficient insurance coverage, and not be involved in litigation.
A borrower candidate seeking an FHA loan can likely get approved in as little as a few days. For a condo development/condo association to receive FHA approval on their project, it may take several weeks or months after applying with the FHA and demonstrating that they’ve met all the requirements involved, according to Realtor Darren Robinson.
An FHA loan can be a fantastic choice to finance a condo purchase, as it offers an easier path to homeownership than some other programs, thanks to its low down payment and credit score requirements.
But you need to make sure that you’re looking at FHA-approved condos in your home search. Otherwise, you may find yourself set on a place that doesn’t qualify for FHA financing.
Whether or not a condo complex is FHA-approved sometimes shows up right on the listing. If not, your agent will be able to find out if it’s already approved, an approval is in process, or if the HOA does not plan to approve the complex at all.
“Research your options carefully, consult closely with your real estate agent and lender, and be prepared to act quickly in this competitive market where condos are selling and closing quickly,” suggests Ailion.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.