How difficult is it to get an FHA loan for a condo? It’s either incredibly easy—or, it’s impossibly hard.
A condo MUST be in an approved project—and the approval list is short!
If you are interested in purchasing a condominium, you may find that your ability to get an FHA loan is extremely limited. In order for the FHA to make a loan in a condominium project, the project itself must first be approved by the FHA. Unfortunately, only a small number of condominium projects in any given market area appear on the FHA list of approved condominiums.
The reason for the limited number of approvals is that the approval process itself is cumbersome, time-consuming, and often costly. For that reason, most condominiums bypass FHA approval, forcing buyers to use conventional loans only.
Conventional loans represent the lion’s share of mortgages on condominiums. This is because there is no formal approval process of a condominium for conventional lending purposes. The individual lender only needs to certify that the project meets certain industry standards, and they can then make loans in that project.
Unless a condominium has been specifically approved by the FHA, you’ll not be able to get an FHA loan on a unit in the project.
What the FHA needs in order to approve a condo project
The FHA has a large number of very specific requirements that must be met in order to approve a condominium project for lending purposes.
This is a complicated process — you can read the official FHA article about condo requirements here — but here are the basics:
Must have adequate insurance coverage
A condominium is a legal entity that owns both the common property within a project, as well as the actual physical structures that contain the housing units. The “owner” of a single condominium unit owns only the interior of the unit, from the interior walls in. The condominium association owns everything else. As such, the condominium association must have adequate insurance sufficient to cover common hazards.
This includes hazard insurance, which covers damage to the exterior of the buildings (the condominium unit owner must have contents insurance to cover personal possessions). It must also maintain liability insurance, in case there are accidents that take place on the property and result in lawsuits or other claims.
If the condominium project is located in a flood hazard zone, the association will also be required to maintain adequate flood insurance.
The FHA will review the condominium’s master insurance policies to determine the extent and adequacy of the coverage.
Limited commercial use
Any condominium project approved by the FHA must be primarily residential in nature. As such, any commercial usage—including retail or office space—is limited to not more than 25% of the project’s total floor space.
Individual ownership restriction
No more than 10% of the total units in any condominium project may be owned by one investor. This restriction also applies to builders and developers, who may rent out unsold units. The FHA wants the majority of units to be owner-occupied, and will look closely for factors that will make it otherwise.
The project must be substantially complete
This means that common area structures, as well as the housing units themselves, must be complete. There will be exceptions for minor unfinished work, such as landscaping. This restriction alone is a major reason why more condominiums are not FHA approved. Though a builder or developer may have a strong incentive to get FHA approval, they are prevented from doing so in the early stages of development—when that approval would be most beneficial—by the fact that the project is not complete.
The FHA will review the bylaws and covenants of the condominium. They will want to know that the documents do not contain language that will give the association “right of first refusal” in any way that violates the Fair Housing Act. They will also want to be certain that it does not interfere with a mortgagee’s right to foreclose on a unit.
Prohibition of “condotels”
A “condolel” is a condominium project that also doubles as a resort type property. Buyers can purchase a unit as a primary residence, but there are also facilities—as well as on-site management capabilities—that can be rented out on a short-term basis to vacationers. The FHA prohibits this type of project.
The project must be located a reasonable distance away from a well-traveled road, an active railroad, an airport, or a military airfield. It also cannot be near a dump or landfill or constructed on a site that has unstable soil.
At least 50% of the units in the project must be owner-occupied, or sold to owners who intend to occupy the units.
Payment of homeowner’s association dues
No more than 15% of the units can be behind on their homeowners association dues. This relates to the financial integrity of the association and its ability to maintain insurance coverage and adequate maintenance.
Since a condominium association owns all of the physical structures, including roads and sidewalks, there will have to be adequate reserves for the eventual replacement of all of the structures. A review of the reserve situation must be no more than 12 months old.
This is just a summary of the general requirements for FHA condominium project approval. If you would like to research the topic in greater detail, you can review FHA Mortgagee Letter 2009-09.
Your options if a condo project isn’t FHA approved
So what can you do if you find the perfect unit in a condominium that has not been FHA approved? There are two options:
Go with a conventional loan
As noted above, conventional loans can be made in a condominium project as long as the lender can certify that the project meets basic industry standards for lending purposes. That will give you a choice of far more condominium projects than you will find on the FHA list of approved projects.
Ask the condo association or your lender to get FHA approval
Though it never hurts to ask, this idea will likely be shot down quickly. It takes reams of documentation, and weeks of review by the FHA, for a project to be approved. And more likely, there will be numerous requests for additional documentation along the way. Most condo associations and lenders have little time nor the budget to get the project approved for a single loan. It is also entirely possible that the project has already been submitted for approval by the FHA, but was declined.
So while the whole topic of FHA condominium approvals is complicated, your choices are actually very simple: Either purchase a unit in an FHA-approved condominium project, or go with conventional financing.