Buying a home or condo with a conventional loan means you’ll need a 20 percent down payment, which is a hefty chunk of change. If you can’t come up with that much cash, you have another option: an FHA loan, which is insured by the government and requires as little as 3.5 percent down.
These low-down payment loans are usually done for single-family homes, but condo loans are also eligible. Unfortunately, finding FHA-approved condos wasn’t always easy, but a rule change that went into effect in 2019 loosened restrictions, making it easier for more condos to meet the eligibility requirements for an FHA loan.
If you’re looking for this type of mortgage on a condo, it’s important to learn what it is and what it means for you as a buyer.
What is an FHA-approved condo?
FHA loans are insured by the Federal Housing Administration, or FHA. They’re meant for first-time homebuyers or those who haven’t owned property in the last three years. An FHA-approved condo is a condominium that is eligible to be purchased with an FHA loan.
“This makes them an especially popular choice for condos, which attract lots of first-time buyers,” says Will Rodgers, a real estate agent with Keller Williams Realty in Virginia. “This is because they are usually the most affordable option.”
Not all condos offer buyers the chance to finance them with an FHA loan. Some condo associations aren’t excited about attracting owners who need a lower down payment to qualify. These associations might believe this means those owners are more likely to default.
How to find an FHA-approved condo
Before you find your dream condo, check if it’s FHA-approved. You can browse the list of FHA-approved condos on the U.S. Department of Housing and Urban Development’s (HUD) website. Here, you can find condos in your area that are FHA-approved.
Ashley Romiti, a licensed real estate agent and advisory board member for Home Life Digest, says you shouldn’t forget fees and condo requirements when conducting your research.
“Make sure you consider association fees, condo bylaws, cash reserves and amenities,” Romiti says. “Talk to a lender to learn more about the next steps. You will be looking for the lender who offers you the lowest interest rates.”
You’ll want to follow similar steps as you would when seeking any kind of home loan, like:
- Getting your credit score as high as you can before getting preapproved
- Saving for a down payment, even if you can only put down the 3.5 percent minimum
- Buying only what you can afford
Also, find a real estate agent who is well-versed not only in your future neighborhood, but one that’s familiar with FHA-approved condos.
FHA approval requirements for condos
Before you get started buying an FHA-approved condo, make sure you know what condos need in order to qualify:
- According to HUD, the property or project must be completed, which means if a project is still in the process of being built, it won’t qualify.
- No more than 50 percent of units can be used as rentals or be investor-owned. This means you have to buy the unit and actually live in it.
- The property must be insured and the condo association must keep at least 10 percent of the HOA budget in a cash reserve.
- No more than 35 percent of the property can be for commercial use.
There are other restrictions, such as forbidding FHA loans for units in condotels (condos that have many hotel-like amenities and which rent units to vacationers) or for condos in undesirable areas, such as close to a landfill or airport.
What is the process of getting a condo FHA-approved?
Condos that are looking to accept buyers borrowing an FHA loan have to go through an approval process and get recertified every three years to remain eligible for FHA loans. Under the new rules, individual condo units can be eligible for FHA loans even if the full development isn’t FHA-approved. This type of single-unit approval is called spot approval.
The approval process varies depending on the original structure requesting approval. For instance, older buildings might have a longer approval process than new projects.
Condo developments looking to get approved need to complete the HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP) for lenders. Once a condo is approved through HRAP or DELRAP, it’ll receive a condo ID used for the project, as well as a submission number.
Pros and cons of FHA-approved condos
- Higher applicant pool – HUD estimates that 84 percent of FHA-insured condo buyers have never owned a home before. This allows condominiums to keep open units to a minimum and increases the number of potential buyers who can be approved for mortgages.
- Flexible terms for owners – FHA-approved condos offer the same flexibility that traditional homes do: low down payments, more lenient credit requirements, and the government owns the loan rather than a private lender.
- More choices for potential buyers – The more FHA-approved condos there are, the more opportunities for families to own homes and build equity, rather than rent.
- Mortgage insurance is required – Mortgage insurance is required for FHA loans since they accept less than 20 percent for a down payment. This will increase the cost of your monthly payments.
- Recertification is required – For condos, the recertification paperwork can be considerable, even though the recertification process now occurs every three years instead of two.
- Units still limited – “It’s important to know that it’s not open-ended in terms of the amount of FHA financing that can be done in a building,” says Esther Phillips, senior vice president of Key Mortgage Services in Chicago. “Only a certain number of condos can be FHA-financed in a non-FHA approved building.”