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Condos offer a compromise between renting and owning: You build equity in a piece of property, but you share amenities with other owners and pay to outsource the maintenance.
If you’re looking to buy a condo, you have several mortgage options, including an FHA loan. Just be prepared for some extra scrutiny during the homebuying process.
Here’s what you need to know about buying FHA-approved condos in your area:
- What are FHA-approved condos?
- How FHA approval for condos works
- Pros and cons of FHA-approved condos
- How to find FHA-approved condos
- What to do if your dream condo isn’t FHA-approved
What are FHA-approved condos?
An FHA loan is a mortgage insured by the Federal Housing Administration. These loans often appeal to first-time homebuyers due to their lenient credit and down payment requirements. An FHA-approved condo is any condo unit that meets FHA loan eligibility requirements.
To qualify for an FHA loan, you’ll likely have to meet the following criteria:
- Credit score: 500 or higher
- Down payment: At least 3.5% of the purchase price of the condo
- Debt-to-income ratio: 43% or lower
- Mortgage insurance: 1.75% upfront premium; 0.45% to 1.05% fee annually
- Property: The condo must be your primary residence
Learn More: FHA Loan Requirements and Qualifications
How FHA approval for condos works
If you’re looking to get an FHA condo loan, the condo will need to go through an approval process. However, the FHA loosened its eligibility requirements for condo owners in 2019.
Now, individual condo units can be eligible for FHA loans even if the full development isn’t approved — a process called “spot approval.”
Here are some common criteria that a condominium project must meet to receive FHA approval:
- In condo buildings with at least 10 units, up to 10% of the units can be FHA-insured. For condo buildings with fewer than 10 units, only two units can have FHA loans.
- At least 50% of units must be owner-occupied.
- The condo must have adequate insurance and keep at least 10% of the HOA budget in a cash reserve.
- At least 85% of the units must be current on their condo dues.
- No more than 35% of the property can be for commercial use.
- Every three years, the condo project must be recertified to ensure it still meets requirements.
However, with the more relaxed financing requirements, the FHA expects up to 70,000 units per year to become eligible for FHA loans.
Learn More: Everything You Need to Know About Buying a Condo
Pros and cons of FHA-approved condos
With looser eligibility requirements, it might be easier for you to qualify for an FHA-approved condo. But this type of home comes with drawbacks as well.
Pros
- They’re easier to qualify for. The credit score and down payment minimums for FHA loans are more lenient compared to conventional loans. You can put down as little as 3.5% with a credit score of at least 580.
- The mortgage might be cheaper. The median condo price was 14% cheaper than the median price of existing single-family homes in November 2020, according to the National Association of Realtors.
Cons
- You’ll have to pay mortgage insurance. FHA loan recipients must pay two types of mortgage insurance: an upfront fee of 1.75% of the loan amount plus an annual fee equal to 0.45% to 1.05% of the loan amount. This will increase the cost of your monthly payments.
- Competition is fierce. Although new rules make it easier to find an FHA-eligible condo, they’re still in limited supply. There might be dozens of other interested buyers on a single unit, which could lead to a bidding war.
While Credible doesn’t offer FHA loans, it can help you compare great home loan rates on conventional loans and give you a better idea of how much you can afford. In just a few minutes, you can see personalized, prequalified rates from all of our partner lenders.
Find Out: How to Get Rid of FHA Mortgage Insurance
How to find FHA-approved condos
If you’ve found a great condo, you’ll want to check if it meets FHA requirements. Use the U.S. Department of Housing and Urban Development’s search tool to find out if the one you’re eyeing is eligible.
You’ll need to know some details about the condo development, including its name, condo ID, city, and state.
When you fill out your information in the tool, be sure to select “Approved” under the “Status” drop-down menu. This way you’ll only see condos eligible for FHA loans.
But there are more ways to use the tool as part of your FHA condo search:
- Fill out the information in the tool. But under the “Status” drop-down menu, choose “Rejected.” In complexes that have been rejected, you may still request spot approval for a single unit. Your lender can work with the condo association to file paperwork.
- When you check the list of condos in your area, look at the “Comments” column. If you see the word “Exists,” click it to read why the complex didn’t receive FHA approval. In some cases, the issue can be fixed. For example, the development forgot to include some of the required paperwork.
What to do if your dream condo isn’t FHA-approved
If you’re looking to buy a condo that isn’t approved for an FHA condo loan, you can finance it through a conventional mortgage. These mortgages can be a good alternative to an FHA loan.
However, you’ll need to meet standard conventional loan requirements, such as putting down at least 3% on the home and having a credit score of no less than 620.
| Loan type | Down payment | Description |
|---|---|---|
| Fannie Mae 97% LTV Standard | 3% | At least one borrower must be a first-time homebuyer; requires mortgage insurance |
| Fannie Mae HomeReady | 3% | For credit-worthy low-income borrowers. Income cannot exceed 80% of the area median. |
| Freddie Mac Home Possible | 3% | For very-low-, low-, and moderate-income borrowers |
| Piggyback loan (80/10/10 loan) | 10% | Allows borrowers to take out a second mortgage at the same time as the first mortgage to cover 10% of the purchase price and avoid PMI |
Learn More: Piggyback Loan: How to Save on Your Mortgage with an 80-10-10 Loan
Credible doesn’t offer FHA loans, but we can help you compare prequalified rates for conventional mortgages. Check out the table below to see rates from all of our partner lenders.
