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How and Why You Want FHA Condo Approval

By Bill Gassett | March 24, 2023

A condo might be perfect if you don't want to buy a single-family home. Though, if you want to use an FHA loan, you might find it more difficult as condos need to be approved.

There are many things to know about buying a condo, and this is one of them. We will take an in-depth look at the FHA condo approval process and the importance of doing so.

What are FHA Approved Condos?

Many people do not know that FHA has condo approval requirements. The Department of Housing and Urban Development (HUD) administers aid to local agencies to assist low-income residents.

The Federal Housing Administration (FHA) is part of the HUD and backs home loans through approved lenders.

After being appraised, condo developments or individual condos can be approved for FHA loans. When this happens, they will be given a condo ID number and added to the FHA approval list.

Before 2019, only the entire condo development could go through the approval process, but since then, individual condos can be approved by themselves.

FHA Condo Approval Process

Why Does the FHA Need Condos to be Approved?

The FHA is insuring loans for borrowers to buy condos, and they want to ensure the property will hold its value.

Since the FHA allows down payments of 3.5% and lower credit score requirements, there is more risk. For this reason, they also require recertification appraisals after 3 years.

How Do Condos Get FHA Approved?

If the FHA doesn't approve the condo complex, a borrower can start the process for the condo they want to buy. Approving condos is more difficult than approving an FHA loan on an individual house.

The condo association's finances are evaluated since they can contribute to the value of the individual condos.

For approval from the FHA, borrowers and the condo association need to complete paperwork. When communities do not already have approval, it is often because the developers didn't consider it worth their time to complete this paperwork.

The FHA Condo Approval Process

A condo development that wants FHA approval needs to pass the HUD Review and Approval Process (HRAP) or, for lenders, the Direct Endorsement Lender Review and Approval Process (DELRAP). These approval processes can take longer for older properties with more unusual features.

After going through either of these reviews, the condo community will receive an ID and submission number. With a condo ID, homes within the community can be purchased using an FHA loan.

Single-Unit Approval

Also known as spot approval, single-unit approval is when a lender approves a single unit in the community for an FHA loan. While the entire community has to meet some basic rules, the lender will make their approval for that individual unit only.

Even if spot approval is granted, this approval will have to be recertified every 3 years through an FHA appraisal. This is to ensure the condo still meets the FHA’s condition standards.

The borrower might also need to provide a larger down payment than is normally the case with FHA loans. A 10% down payment or more might be required if the loan is manually underwritten for single-unit approval.

FHA Condo Approval Eligibility

If you want approval for an FHA loan, you and the condo must meet certain requirements.

Borrowing requirements

The home has to be the primary residence of the borrower, and other requirements include:

  • Credit score. Your credit score will need at least 500, but this depends on the lender, and many will have higher requirements.
  • Down payment. FHA loans require a minimum down payment of 3.5%, though if your credit score is lower, this might be 10%.
  • Debt-to-income. Depending on your credit score, the lender eligibility rules for your debt-to-income ratio can differ. Normally your DTI cannot be higher than 57% though this depends on the lender.
  • Mortgage insurance. You must also pay mortgage insurance with an upfront fee of up to 1% annually.

Basic FHA community requirements

An FHA-approved condo needs to meet certain requirements, this includes increasing in value, and the community must be complete, at least in its current phase. Other requirements include:

  • 50% or more of the units must be owner-occupied
  • Up to 50% of the units can use FHA loans
  • In small developments with 10 units or less, only two can use FHA-insured loans
  • Not more than 35% of the condos can be commercial use
  • The condo association has to have a 10% cash reserve
  • No more than 15% of the units can be behind on their condo dues
  • Individual units or the complex needs to be recertified after 3 years

Finding an FHA-Approved Condo

You can find already approved homes on the FHA condo approval list. This is available on the HUD website, and you can search the state or county for approved condo developments.

Final Thoughts on FHA Condo Approval

Whether buying or selling, having FHA condo approval is essential. A significant percentage of borrowers use FHA home loans for purchases. Not having approval means many buyers cannot use their financing without going through an approval process.

It's wise to take the time and get FHA approved upfront.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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