FHA-approved condos: A homebuyer's guide

If you're looking into buying a condo, there are a few ways to fund its purchase. One of the lesser-known approaches is to finance a condo with a loan from the Federal Housing Administration — an FHA loan . Let's explore FHA-approved condos: what they are, how a willing homebuyer can find one, and their pros and cons.

What is an FHA-approved condo?

An FHA-approved condo is one that can be purchased with an FHA loan. This type of loan is backed by the federal government and is quite popular among first-time homebuyers. To get approved, the condo must be reviewed by either the U.S. Department of Housing and Urban Development (HUD) or a HUD-approved lender.

Several years ago, the whole condominium community had to be approved for buyers to be able to finance a purchase with an FHA loan. However, HUD changed the rules in 2019 to increase the number of available units. Now, it's possible for buyers to get approval for condos located within communities that did not take part in the review. The process of approving a single unit is usually called "spot approval."

Why does a condo need to be approved for an FHA loan?

There are a couple reasons why a condo or the entire development must undergo the approval process. Since FHA loans are backed by the government, the agency typically wants to ensure that the community and individual units would maintain their value in the long run. Similarly, this process can evaluate the financial stability of the condo development, verifying whether it's a solid investment for both buyers and lenders.

How to find FHA-approved condos

If a potential buyer is curious whether the home they like is FHA-approved, it is fairly easy to find out this information. First, a homebuyer would have to go online to the dedicated HUD site; since every approved condo has its own ID number, it's possible to look it up in the system. If house hunters want to see all FHA-approved properties in the area, it is possible to search condos by state, city or ZIP code.

FHA condo approval requirements

Not every development or single condo can be approved for FHA loan financing. Here’s some of the requirements that the property needs to meet:

• The condo must be fully completed.
• No more than 35% of the property can be used commercially.
• 50% or more of all units must be occupied by owners.
• The property must be insured.
• The condo project cannot be a manufactured home.
• The property must be located at a development with at least five dwelling units.

Pros and cons of FHA-approved condos

Now, knowing in detail what FHA-approved condos are, let's look at the main advantages and disadvantages homebuyers may want to know when considering buying an FHA-approved condo.

Pros of FHA-approved condos

• Flexible terms: Typically, FHA loans are likely to have a lower down payment and lower interest rates than many other loan options, which might make it an attractive alternative for borrowers, especially those purchasing their first home.
• May be easier to qualify for: FHA loans are also known to have more lenient credit score and debt-to-income (DTI) requirements, which may offer an easier and swifter path toward homeownership.
• Affordability: An FHA-approved condo may be an alternative for those homebuyers who cannot afford higher-priced single-family homes in the area or prefer living in a condo development.

Cons of FHA-approved condos

• Required mortgage insurance: Homebuyers who are going to finance their purchase with an FHA loan are required to pay an FHA mortgage insurance premium (MIP), which consists of a one-time upfront charge and annual payments that depend on the down payment amount and the loan-to-value ratio.
• Limited supply: Even after the 2019 changes, it may still be quite difficult for buyers to find FHA-approved condominiums in their area. In certain cases, they may be able to get their dream condo approved even if it wasn't before, but it may require significant paperwork and effort.
• Mandatory recertification: Approved condos must undergo recertification every three years by submitting additional paperwork. Otherwise, they may lose their FHA-approved status.

In summary

An FHA-approved condo is a condominium that can be funded with an FHA loan. These condos may be an alternative for homebuyers seeking affordable housing options, simultaneously enjoying the benefits of an FHA loan. If buyers consider financing their purchase with an FHA loan, it may help to talk to a professional lending advisor to weigh all the options.

FHA-approved condos: FAQs

1. Why would a condo not be FHA-approved?

There is a full list of requirements that must be met for a condo to be qualified for approval. For example, if the development is still under construction or there are less than five units in it, it could be rejected by HUD.

2. Can you buy a condo with an FHA loan?

Yes, it is possible to buy a condominium with an FHA loan. However, this condo (or the whole community) must be reviewed and approved by HUD or a HUD-approved lender. Additionally, potential buyers must get approved by a lender to be able to purchase a condo with an FHA loan.

3. How long does it take to get FHA loan approval?

The timeline for FHA loan approval can vary significantly depending on specific conditions and the borrower's individual circumstances. Typically, it could take anywhere from one month to over a couple of months.