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FHA Approved Condominiums

By Gretchen Wegrich Updated on 11/2/2013

Condo for FHAFHA Approved Condominums are properties best suited for first time homebuyers. Many borrowers, especially first-time home buyers look to FHA because the requirements are much friendlier to qualify than a conventional loan.  These borrowers usually opt for an FHA loan, which allows them to finance up to 96.5% of the total loan value. 

However, as the name implies, the condo must be approved by the Federal Housing Administration (FHA Approved Condo), with no exceptions. 

Basic FHA Condo Approval Requirements

When considering the requirements for FHA approved condos, the FHA will consider several key factors, the three most crucial requirements being:

  • Ratio of homeowners to investors. In order to receive approval, the ratio of homeowners to investors cannot be less than 50%; in other words, investment properties cannot exceed 51% of the homes. 
  • Number of delinquent HOA fees. No more than 15% of homeowners may be delinquent their Homeowners Association fees to be approved.
  • HOA fees in reserve. Typically, the Federal Housing Administration will require that the Homeowners Association have a minimum of one year in HOA fees saved in reserves, though most decent HOAs will already have satisfied this requirement.

If one of these qualifications is not met, the FHA will not approve the condo project.To verify whether a condominium project has been approved for FHA financing, search HUD Condominium listings for more information.

For a comprehensive look at the qualifications for FHA condo approval, visit our Lender411 pages FHA Approved Condo Requirements and FHA Condo Eligibility.

 

FHA Approved Condo Advantages

A smaller down payment

The down payment requirement for an FHA loan is 3.5% and the entire amount can be gifted by a relative. This gifting of the down payment helps many new buyers who have not been able to save the 3.5% down. With a conventional loan, at least 5% is usually required and some lenders require 10% to 20% down. 

A lower interest rate

The interest rate on the government FHA loan is generally lower than a conventional loan – by as much as .5%.

A higher debt-to-income ratio

The debt-to-income ratio is the percentage of a consumer’s gross income that goes to paying monthly debt including the mortgage payment and the HOA fees. With an conventional loan a borrower the requirement is 45% debt-to-income. The FHA guideline is 50%, which opens up a significantly wider range of borrowers.

For many first-time homebuyers, condo purchase can be an excellent investment, as a much simpler and more affordable alternative to home purchase. As such, FHA condominiums can be even more beneficial, providing low to moderate income borrowers with access to incredibly affordable FHA mortgages with minimal down payments.

In addition, due to the increasing popularity of the FHA mortgage program, FHA condominium approval has become an asset in itself, as an overwhelming majority of borrowers turn to FHA mortgages when financing condo purchases.

As such, sellers of condominiums with FHA approval will have a tremendous advantage over other condominium sellers.  Why?  Because you will have a much greater range of borrowers whom would be willing to purchase the property. By losing the majority of buyers due to a technicality, homeowners with condos not approved by the FHA will only find buyers who are investors, searching for the cheapest deals, a small minority of first-time homebuyers with a 20% down payment, and a small portion of retired borrowers hoping to buy down. With a significantly wider range of borrowers, FHA-approved condos have seen an increase in demand, pushing the value of these properties upward.

FHA Condo Approval

In order to obtain FHA condo approval, the Board of Directors for the condo complex’s Homeowners Association must contact the FHA approval company. While approval typically includes a fee of approximately $2,000, it is well worth the potential value increases of the condos, if not to avoid the potential losses through devaluation by receiving approval.

As the fiduciary, the Board has the responsibility to ensure that their condominiums are as eligible for sale as possible; however, often the HOA management company keeps the Board informed with these rules and regulations and will skip this approval in order to save time and money, neglecting to mention it to the Board or else misrepresenting the issue.

While this can save some immediate trouble for the company, skipping FHA approval can critically diminish the value of the properties. As such, borrowers hoping to purchase a condominium should always inquire as to whether or not the property has been approved by the FHA.

How can I get my HOA to obtain FHA approval?

If you live in a condo project that has not been approved and would like to get approval, speak with your neighbors and discuss this opportunity; many condo owners may not be aware of the substantial benefits of FHA approval. In addition, raise the issue at the next Homeowners Association Board meeting and specifically request for immediate FHA approval. Since FHA approvals can expire, many Boards may not be aware that they are not approved, and management companies may neglect to present this issue.

FHA Condo Approval Expiration

When the Federal Housing Administration grants approval for a condo complex, this carries an expiration date, at which time the project must either recertify or stop accepting FHA funding for condo purchases. Basically, in order to retain FHA approval on the complex, the Board is responsible for resubmitting an approval application before the approval expires.
To find out when your association’s FHA Certification expires, visit the HUD website.

FHA Condo Streamline Refinance

Condo owners holding FHA mortgages may be eligible for an FHA streamline refinance, provided that the condo complex retains its FHA approval; if approval has expired, the borrower will be unable to refinance through the FHA, streamline or otherwise, although he or she may still enact a conventional refinance. If you cannot refinance due to approval expiration, discuss the issue with your neighbors and your HOA Board and request immediate FHA approval.

Why FHA Approved Condos?

With a shift in borrowers toward the FHA, the condominium market has been affected, with FHA approved condos growing notably in value.

In terms of condominiums, the majority of buyers are making a first time home purchase. As a result, many have not saved a sufficient 20% down payment amount to warrant securing a conventional mortgage loan without private mortgage insurance. Instead, these first time homebuyers opt for FHA loans, which can finance up to 96.5% of the total loan value. However, in order to purchase an FHA approved Condo, the condo must first have been approved by the Federal Housing Administration; this rule does not have any exceptions.

For a homeowner with an FHA loan, that loan is assumable and with today’s historically low rates, a condo purchased with an FHA loan will be in demand as rates climb.

By losing the majority of buyers due to a technicality, homeowners with condos not approved by the FHA will only find buyers who are investors, searching for the cheapest deals, a small minority of first-time homebuyers with a 20% down payment, and a small portion of retired borrowers hoping to buy down. Consequently, FHA-approved condos can be purchased from a significantly wider range of borrowers, making the demand higher and pushing the value upward.

What is the FHA?

The Federal Housing Administration is a federal assistance program which was created in 1934 to mitigate the adverse effects of the Great Depression, providing citizens with access to affordable loans and consequently the means to purchase a home.  Since its initiation, the FHA has helped to finance over 34 million homes, and FHA loans remain popular today. With additional fees for conventional loans, FHA mortgages have become the optimal choice for first time homebuyers. In fact, 2010 measurements indicated that FHA loans comprised roughly 40% of all mortgage home purchases, rising drastically since before the mortgage market downturn.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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