Condominiums are a common real estate option in more compact, urban areas. These convenient properties boast many units or homes and are often more affordable than traditional single-family homes.
FHA loans can finance condos, making them a smart choice for borrowers with lower credit scores or other financial challenges.
There is a catch: you can only buy certain FHA-approved condo units or within FHA-approved condo communities. Are you considering buying a condo with an FHA mortgage loan? Here’s what you need to know.
In a nutshell
You can use Federal Housing Administration (FHA) loans to purchase a unit in a condominium community. However, the unit or the community as a whole must be approved by the FHA and meet certain property and building standards. To find an FHA-approved condo, you can use the HUD’s online condo search tool or work with an experienced FHA loan lender.
Can you buy a condo with an FHA loan?
Yes. FHA loans, or mortgages guaranteed by the Federal Housing Administration, can finance traditional one- to four-unit properties, as well as manufactured housing and condo units.
Take note, though: those condo units must first meet the FHA’s property and building standards which are set to ensure that borrowers purchase safe, habitable living quarters and that the properties will hold their value over time (in case you default on the loan and the FHA needs to sell the property to get its money back).
What is an FHA-approved condo?
An FHA-approved condo is one that an FHA appraiser has determined meets the administration’s minimum property standards. Before 2019, HUD had to approve an entire condo community before you could buy a unit. Now, the FHA will approve individual units even if the larger community isn’t approved.
Condo units can be approved using one of two methods: the HUD Review and Approval Process (HRAP) or the Direct Endorsement Lender Review and Approval Process (DELRAP). With HRAP, the FHA itself reviews the property to ensure it meets FHA standards. DELRAP gives only certain lenders the authority to approve a unit without the FHA’s direct input.
Neighbors Bank currently has the authority to approve condominium units via the DELRAP method.
How to Get an FHA-Approved Condo
The easiest way to buy a condo with an FHA loan is to find a unit within an already FHA-approved condo community. You can search for ones in your area using the Department of Housing and Urban Development’s (HUD) FHA condo search tool.
If a condo you’re eyeing is not in an already approved condo community, Neighbors Bank can help. We offer FHA condo financing and can help you navigate the approval and financing process from start to finish.
1. Find a HUD FHA-Approved Condo
To start, find an FHA-approved condo using the FHA’s search tool or locate a lender who’s well-versed in FHA condo loans and can help get your ideal condo unit approved by the FHA.
Choosing an FHA lender authorized to use the FHA’s DELRAP process can ensure this happens efficiently and correctly.
To be approved, a condo unit must be located in a community that meets the following requirements:
- Is primarily residential
- Consists entirely of one-family units
- Has at least five units in the community
- Is complete in construction and ready for occupancy
- Is in full compliance with local development and building laws
- Has at least 50% owner occupancy (no renters or tenants)
- Has no more than 35% of the community dedicated to commercial use
For an entire community to be approved, the development must be fully complete (not under construction), have insurance coverage, have a homeowner’s association with at least 10% of its budget in reserves, and have at least 50% occupancy by owner.
2. Find an FHA-Approved Lender
You must use an FHA-approved lender to receive FHA financing — on any property type, but it can be especially important with condo purchases, as they often require unit or community approval too.
To find an FHA-approved lender, you can use HUD’s approved FHA lender search tool. Be sure to research your options directly too. The more experience a lender has in FHA loans, the better, as FHA financing tends to be slightly more complicated than conventional financing (because there’s more government red tape).
3. Get FHA Loan Approval
In addition to the property requirements, you must also meet a lender’s FHA loan requirements, such as a certain credit score, down payment, debt-to-income (DTI) ratio, and more.
Below are the typical requirements for an FHA loan (though lenders can choose to be stricter than this):
- Credit score minimum: 500 (with a 10% down payment) or 580 (with a 3.5% down payment)
- Down payment minimum: 3.5% to 10%
- DTI maximum: 43% is preferred, however, FHA DTI requirements are flexible
- Property requirements: Must be your primary residence and must move in within 60 days of closing
You will also owe a mortgage insurance premium (MIP) both upfront and as part of your monthly payments.
Pros and Cons of an FHA Loan for a Condo
| Pros | Cons |
|---|---|
| Low down payment requirement | Potentially slow process, especially if your condo requires approval |
| Low credit score requirement | Mortgage insurance premiums can be costly and usually aren’t cancellable |
| Low interest rates | Must submit condos for reapproval every three years |
| Easy refinancing if mortgage rates fall | Not all lenders are authorized to offer FHA loans |
FHA loans are just one option available to purchase a condo, so it’s crucial to weigh the pros and cons before diving in. On one hand, FHA loans come with low interest rates and can make it easier to qualify for financing — especially if you have a lower credit or a small down payment. They also offer streamline refinancing options, which make it easier for you to take advantage of lower mortgage rates should they fall later on.
On the other hand, using FHA financing to buy a condo can be time-consuming, especially if the unit or community isn’t already FHA-approved. Mortgage insurance premiums can also be costly with these loans (and, in most cases, are paid for the entire loan term), and you must submit a condo for reapproval with the FHA every three years.
If you’re unsure whether an FHA loan is the right way to finance your condo purchase, talk to a Neighbors Bank loan officer today. We’ll help you make the best decision for your goals and budget.
