If you are in the market to purchase a condo and were hoping to get FHA financing, you might be in for a surprise. Not every condo association is approved by HUD for FHA financing. So how do you know which properties are approved and which aren’t? And what does it mean to be approved in the first place? There are certain requirements the condo must meet in order to be approved. The approval list is meant to protect the buyer as well as the lender as the default rate on mortgages for condos is typically much higher than those on single family homes.
Understanding the Requirements
HUD has some rather straightforward requirements that any association must meet in order to ensure their approval. These requirements include the need for half of the units to be owner occupied. If they are not, and are rented out instead or used as a second home, the association will not be approved. Homeowners are more likely to go out on a limb and do what they can to keep their primary home when they hit financial trouble, but are much less likely to do so if it is an investment property or second home. In addition, the condo needs to be in good standing, meaning that at least 85 percent of the owners must be up-to-date on their association fees and there cannot be any lawsuits out there against the association. These two things would weaken the association and make homeowners less likely to keep up with their payments if they know the association is in trouble. Last, but not least, the condo association must have proper insurance to ensure that all areas are covered in the face of natural disaster.
If you stumble across an unapproved condo, you will likely have trouble getting it approved in time to close the loan. In general, it is best to keep looking for other properties that are approved as it is a pretty standard procedure that many associations have gone through. If you find a condo that was once approved but no longer is or one that has never been approved, it can be daunting to go through the process from scratch. Some associations are willing, especially if they are brand new, but most will not deal with HUD, forcing you to look elsewhere.
Alternatives to FHA
If you have a least a 5% down payment, good credit, and a steady job, you may be able to bypass the need for an FHA loan and instead get a conventional loan. While these loans require private mortgage insurance if you put less than 20% down, they are a great way to save money and hassles that FHA financing can cause. Conventional loans do have an approval process, but it is a quick questionnaire that covers the basics of the association. They are similar questions to the FHA loan, such as requiring that more than half of the units be owner occupied; that 90% of the units are sold; and that the association has been turned over to the owners.
If you are in the market for a condo, make sure to do your homework. The FHA’s website has a tool that can help you look up condos to see if they are on the approved list. If they are not, you will have to decide if you want to try to obtain conventional financing; try to get the association approved with HUD; or search for a different condo. Remember that condos are a dime a dozen so if you find one that is not approved, there is likely a counterpart close by that is approved and ready for you.