Everything you need to know about FHA approved condos

What's the Deal with FHA Approved Condos.png

If you're in the market for a condo, you're probably also looking for a mortgage. While borrowers in the US are spoiled for choice when it comes to home loans, the less money you have to work with, the more limited your options are. Along with a large and thriving conventional home loan market, borrowers can also access non-conventional loans that come with government insurance.

Federal Housing Administration (FHA) loans are popular with first-home buyers and everyday Americans who want  to enter the condo market.

Conventional loans vs non-conventional loans

Before diving into the details of FHA loans and FHA approved condos, it's important to understand the difference between conventional and non-conventional mortgages. Conventional mortgage products are defined by the complete lack of government insurance. These loans originate in the private sector and have no involvement from the United States government. When a conventional home loan is insured, it's called private mortgage insurance (PMI).

In contrast, non-conventional loans require government insurance in order to mitigate risk to the lender. FHA loans are a specific and highly popular type of non-conventional home loan product, with loans also available through the Veterans Administration (VA) and Rural Development Services among other organizations. While both conventional and FHA loans originated in the private sector, FHA loans are insured by the government through the Federal Housing Administration.

FHA loans have federal backing, with lenders compensated if the homeowner fails to repay the loan for any reason. Protection for the lender also creates an attractive environment for the borrower, who is more likely to secure a loan with a low down payment or compromised credit score.   

What is the FHA?

The FHA is directly involved with stimulating the domestic housing industry by helping more people to obtain mortgage finance. This organization was created in 1934 as a result of the National Housing Act. Along with the Federal Savings and Loan Insurance Corporation (FSLIC), the FHA has the mandate to improve housing conditions, reduce foreclosures, and provide mortgage insurance to stimulate the housing sector.

Types of FHA loans

FHA loans were created to get more first-time buyers into their own home. While the private mortgage market offers competitive and efficient finance to American residents, a standard 20 percent deposit is needed for most loans, along with a healthy minimum credit score of 620-640. While there are lots of people out there with conventional home loans, not everyone can meet these requirements.

FHA loans also need to meet certain criteria, with a down payment of 3.5 percent typically required along with a minimum credit score of 580. The FHA offers a range of home loan products within these guidelines, with the popular owner-occupier home loan available alongside a number of specialized loans for existing homeowners.  

  • Traditional owner-occupier or first-time buyer mortgage

  • Home Equity Conversion Mortgage (HECM) program, which is a reverse mortgage program for seniors

  • FHA 203k improvement loan, for repairs and renovations

  • FHA’s Energy Efficient Mortgage program, for upgrades capable of lowering energy bills

  • Section 245 (a) loan, a program for borrowers who expect their incomes to increase

If you have any type of FHA loan, you need to pay two types of mortgage insurance premiums (MIP).

  • Upfront Mortgage Insurance Premium (UFMIP) 

  • Annual MIP (charged monthly)

FHA loans for a condo purchase

Along with financial criteria related to down payments and credit scores, FHA loans need to tick a number of additional boxes. This has a number of implications for condo purchases, with both the individual buying the condo and the condo property needing to meet certain standards.   

Condo buyer approval

In order to qualify for an FHA loan for a condo, the individual needs to meet the following eligibility criteria before they make a loan application:

  • A steady employment history

  • A valid social security number

  • Lawful residence in the USA

  • Of legal age to obtain a mortgage in your state

  • Two years out of bankruptcy

  • Three years out of foreclosure

As a potential condo buyer, you'll also need to meet all the regular lending criteria set by banks and other lenders. While this process can seem long-winded and intrusive, generally speaking, they want to look at the relationship between your income and debt in order to measure the risk factor associated with giving you a loan.

Condo property approval

FHA loans are primarily designed to help first-time property buyers and owner-occupiers. While these loans can be used by investors, the property must become the investor’s primary residence. 

In order to be approved, the home loan must be appraised by an FHA approved appraiser, and the condo must meet minimum construction and repair standards. The primary residence, property appraisal, and construction quality provisions are applied to all US properties listed in all FHA loan applications. 

Condos present a number of additional challenges, however, with the unique ownership arrangement of a condo providing a few more hurdles to overcome. Unlike most detached dwellings, condos involve a hybrid form of ownership, which means lenders face additional risk.

Due to this hybrid arrangement, both the individual condo owner and the Condo Board need to be approved by the FHA, with only selected condo projects placed on the FHA approval list. There are currently 61,132 approved records on the national condominium list published by the U.S. Department of Housing and Urban Development (HUD).

If you're interested in getting an FHA loan, it's easy to search this list by state, county, and condo name among other criteria. With so many condos on the list, however, it's not unusual for properties to let their paperwork expire. You should also do your own research by calling the listing agent, talking to potential lenders, or making contact with the condo community to make sure everything is legit and up-to-date.

The FHA condo approval process is often seen to be shrouded in mystery, with new projects often waiting months or years before they get approved. Despite the inefficient nature of this process, however, it does operate by known rules. 

The following list summarizes all the boxes that need to be ticked before the FHA will get on-board:  

  • The condo must have been fully completed for a year, with no pending additions or new phases.  

  • At least 80% of all FHA loans in the complex must be for owner-occupied units.

  • At least 51% of the units must be owner-occupied.

  • No more than 50% of the property can be used for shops and other commercial applications.

  • No more than 15% of units can have delinquent dues for more than 60 days.

  • At least 10% of the Board's budgeted income must go toward a reserve account.

  • There must be enough reserve funds to cover capital repairs and replacements for at least two years.

  • The board of directors can't have the power to approve or deny a lease.

  • The condo association needs to show positive financial health, including adequate insurance.

  • The condo must be located within a reasonable distance of a well-traveled throughway.

Above all else, this list is designed to ensure the financial health of the condo community in question. In effect, any lender that offers you an FHA loan is also lending money to the community. Double the risk means double the checks and balances, with this level of diligence often exhausting.

While the FHA condo list and approval process are designed primarily to protect lenders and the US government, individual condo buyers can also come out on top.

Even though your options may be limited in certain locations, the HUD condo approval list can help you to find high-quality condo communities across the United States. Remember, if the condo project you're looking at isn't on this list, there may be a very good reason why.  

How to qualify for an FHA loan

Whether you're getting a conventional home loan or an FHA loan, the mortgage qualification process is mostly the same. You apply through a lender in the private sector and jump through all the usual hoops along the way. Getting pre-approved for a mortgage is always a good first step, with lenders able to check your financial, employment, and credit history before giving you an estimate of how much they're willing to lend you.   

When it comes to FHA loans, however, there are actually two sets of qualification criteria. First, you have to meet the lender's criteria, with income-to-debt ratios commonly used to check your eligibility. Then you have to meet the government's criteria, with the borrower and condo project both carefully checked by HUD. While this process can be challenging, and it certainly involves a lot of paperwork, you shouldn't dismay.

Generally speaking, it’s easier to qualify for an FHA loan than a conventional mortgage, with a smaller down payment required and a compromised credit score OK in some cases.  

Down payment amounts

Saving for a deposit is the first step in any property search. While FHA loans require a relatively small down payment, the days of zero money down are well and truly over. FHA loans are primarily intended for young people and low-to-middle income earners who can't raise a 20 percent deposit. Borrowers need just 3.5% of the purchase price or appraised value to apply for an FHA loan, with some lenders going even lower to 3% and others needing a larger 5% sum.

Credit score thresholds

FHA loans are also advantageous for people who have a low credit score or a compromised credit history. Your FICO score is used in this decision-making process, with 300-850 the credit range in the United States. Generally speaking, anything below 620 is considered "bad", at least when it comes to conventional mortgages. For FHA loans, a score of 580 or more is likely to qualify you for a 3.5% down payment loan, with a lower score of 500 or more possibly needing a larger 10% down payment.

FHA loan limits

Just like conventional home loans, FHA loans have "ceiling" and "floor" limits based on location and property type.

The maximum loan amount for large properties in high-cost markets has been set at $726,525 for 2019, with the "floor" for small units in low-cost markets set to $314,827, based on 65 percent of the national conforming average. The values used depend largely on location, with the FHA even making exceptions for markets with unique needs such as Alaska, Hawaii, Guam, and the Virgin Islands.

In all other areas, FHA loan limits are set per county at 115 percent of the current home price based on the Home Price Index (HPI). The FHA’s high-cost value is set at 150 percent of the national conforming cap, which is currently $484,350. The low-cost value is set nationally based on 65 percent of the national conforming limit. If you're looking for an FHA condo loan outside these limits, you're pretty much out of luck.  

High-cost market limits in 2019

  • one-unit: $726,525

  • two-unit: $930,000

  • three-unit: $1,124,475

  • four-unit: $1,397,400

Low-cost market limits in 2019

  • one-unit: $314,827

  • two-unit: $403,125

  • three-unit: $487,250

  • four-unit: $605,525

Special exception market limits in 2019

  • one-unit: $1,089,787

  • two-unit: $1,395,450

  • three-unit: $1,686,700

  • four-unit: $2,096,100

If you're interested in buying a condo, FHA loans and other non-conventional mortgages can be extremely valuable. Not only can you get a home loan without a massive 20 percent down payment, you can also access lower interest rates at the cost of government insurance. The FHA approved condo list is a great place to start the house-hunting process, with all condo communities on this list able to meet strict government standards. Once you get mortgage approval and find the condo of your dreams, you can start to enjoy the lifestyle you deserve.  

Glenn Carter