Obtaining an FHA mortgage for a condo is a tricky process. It takes more work than it would if you were to purchase a single family home that is unattached. Because of the higher level of risks that condos present, namely that there are many other owners that play a role in the value of the property, condos must undergo additional scrutiny in order to get approved. If a condo association is not on the FHA’s approved list of condos, then FHA financing is not allowed there for any borrower. However, if approval did exist when you originated your FHA application and you were assigned an FHA Case Number, then you will more than likely be able to close on the loan as long as the following requirements are met.
Have you Obtained the FHA Case Number?
If you obtained your FHA case number prior to the expiration of the condo’s approval with FHA, then you can close if the property meets the requirements of the approval. In general, HUD requires that the lender looks over the same requirements they would need to look over if the property’s approval did not expire. This means evaluating the number of investors in the property and the number of homeowner’s that are past due on their association dues. If these numbers are too high, then the loan cannot close; if the numbers are in line with FHA’s guidelines, however, and the loan has an FHA number already, closing can go on.
FHA Condominium Approval Requirements
So what are the FHA requirements for an FHA condo? The two numbers that lenders need to be most concerned with when dealing with an association that once had approval, but that will expire prior to your loan closing includes:
- No more than 15 percent of the homeowner’s may be past due on their homeowner’s association dues for more than 60 days. If they are, this is too risky for the lender/FHA as it brings the value down and puts the other properties at risk, mostly because the HOA’s reserves are then depleted because they are not getting regularly replenished by the homeowners.
- No more than 50 percent of the units may be owned by investors. This means that the other 50 percent must be owner occupied – not vacant. If there are a significant number of vacant units, the amount of investor owned properties that are allowed decrease accordingly.
The other basic requirements for FHA condo approval include:
- A reserve account must be established for the homeowner’s association and at least 10 percent of the HOA’s budget must be allotted for reserves.
- The reserves must be able to cover the deductibles for insurance policies and any impending repairs or replacements that must be done in the next two years.
- There must be adequate insurance that covers 100 percent of the replacement cost of the entire property in place.
- If there is commercial space on the property, no more than 50 percent of it can be used for commercial purposes.
The Benefits of FHA Financing
It might seem like a hassle to go through FHA financing for a condo since there are so many requirements for the association, but there are many benefits of doing so. The largest benefit is the flexible guidelines that the FHA offers. People that are purchasing condos are oftentimes first time homebuyers that do not have a great deal of credit or assets to show on a loan application. FHA loans are flexible when it comes to credit and assets, making it a good option. For example, the standard minimum credit score for an FHA loan is 580, but the FHA does allow lenders to go as low as 500 if they think the borrower is worth it. No other loan program allows credit scores even remotely that low. In addition, the FHA does not require reserves and only requires a 3.5% down payment as long as your credit score is above 580, which is much lower than most other programs require on condos because of the risk level they provide.
Obtaining the FHA Case Number
The basic information needed to obtain an FHA case number is simple enough that you should be able to obtain the number shortly after applying for the loan and receiving pre-qualification from the lender. As long as the lender believes you are eligible for FHA financing, the number can be assigned with the following information:
- Borrower full name(s)
- Borrower(s) social security number(s)
- Property address
- Loan information
The system that the lender inputs this information into will then validate your name along with your social security number, taking a look at your credit to ensure that you say you are who you claim to be. In addition, the system will validate the property address to ensure that it is a valid FHA property and that you are eligible for FHA financing on the property.
If the requirements are met, you will receive an FHA case number. This number will be used moving forward with your application as well as for the life of the loan once you close.
If you know that your condo association’s approval is about to expire, it is important to move fast on the underwriting process. You can help this along by providing all of the documents the underwriter needs up front, including pay stubs, W-2s, tax returns, asset statements, employment information, and any evidence of paid collections or bankruptcies. Any information you can provide and the faster you can provide it, the faster the underwriter can approve your file. Generally, underwriters need further information in order to process a file, so staying in close contact with your lender will help you move the process along. If you start the process before the condo association’s approval expires and you ensure that the lender obtained a case number for you, the loan should be eligible to close even after the expiration date, but the faster you move, the better off you will be.