Owning a condo can be more affordable than owning a home, but it can also bring with it more requirements from your bank, especially if you wish to obtain FHA financing. The condo association must be approved by the FHA. Sometimes this is done right when the development is ready to sell its units, but not always. If an association you wish to move into is not yet approved, you will have to go through the steps to get it approved, which could mean waiting weeks for your mortgage approval. The amount of work done on the development and its status in terms of the FHA loan requirements for condos all play a role in how long the process takes. It will not take a lot of work on your part once your lender and the association are involved, but you should know what needs to be done in order for an association to obtain approval.
What Does FHA Approved Condos Mean?
FHA approved condos means that the FHA is comfortable insuring a development. There are several categories that condo associations fall into when determining their approval status. Typically these categories include projects still in the planning stages; condo developments newly built (less than 1 year); condo developments completely built but still under control of the builder; and units that were completed more than 1 year ago and have been turned over the association. The category your development falls under will help determine its requirements and ability to get approved by the FHA for financing.
FHA Condo Approval Guidelines
The guidelines for FHA condo approval depend on its above category. The first category, developments still in the planning stages, takes the most work because there is no history for the FHA to rely on with the builder and association. Once the condo project is in the works, it is best to start the FHA approval process as it could take quite a long time. Along with a detailed description of the development that shows the number of proposed units and its common areas, the FHA needs a detailed map of the development. They will also need a few formal documents that include HUD Form 92250 Environmental Review, Certificate of Equal Employment Opportunity, HUD Affirmative Fair Market Housing Plan, and a written statement from the Historic Preservation Office agreeing to the project. These documents will help get the process started with FHA. Once they are approved and construction begins, the FHA will need:
- Operating budget
- Legal documents
- Management plan
If the above documents receive approval, FHA financing can begin to be offered on the units, but they will be contingent upon certain other requirements, such as occupancy, warranty requirements, and proper site survey.
If the condo development you wish to purchase in has been built, yet is less than one year old, it will have to meet similar requirements as above. The main consideration you need to concern yourself with is whether or not there is a ten-year warranty in place against builder defects and defaults. If there is not a ten-year warranty, condo owners are only eligible to receive 90 percent financing on a condo unit. This means you would have to put down 10 percent of the purchase price, rather than the standard 3.5 percent as is the case with most FHA financing. The documents required for FHA approval are the same as above, however. All legal documents, maps, and description of the development are necessary to get started. In addition, the budget and management plan, whether established or proposed are necessary. If any association meetings have taken place or reserves are already in place, documentation of both items will be necessary.
If the condo development is older than 1 year but has not been turned over to the association, the same requirements apply with a few exceptions:
- All building must be done
- A budget must be in place; it cannot be proposed
- A management plan must be in place; it cannot be proposed
The good news is that if the condo development is complete, all condo owners are eligible to receive full 97.5 percent funding with FHA financing if it obtains FHA approval.
If the condo association is complete and has already been turned over to the association, approval is quick and easy. The same documents as above must be provided, in addition, the minutes from the last 2 association meetings must be provided; proof that 51 percent of the units are owner-occupied; and proof that the association is free from any type of litigation.
Exceptions to the Rules
Certain developments are subjected to exceptions to the rule – these are only developments that already have VA or Fannie Mae approval. In these cases, the approval process for FHA approval is simple. The association will still need to provide all documents from above, but they will also submit the VA or Fannie Mae approval letter. In these cases, an on-site inspection is typically all that is necessary to obtain FHA approval.
FHA 203K Condo Approvals
FHA 203K financing, which is the rehab program offered by the FHA, can also be used on condos as long as they are on the approved list. The funding for condos on this list differs slightly than standard 203K financing, however. The following requirements must be met:
- Unit must be owner occupied
- Only the inside of the condo can be rehabbed because exterior components are the responsibility of the condo association
- No more than 25 percent of the development can be going through rehab at the same time
- The total LTV cannot exceed 100 percent of the value after the changes are complete
Searching for FHA Approved Condos
It is easy to learn how to find out if a condo is FHA approved. If you know the basic facts of the development, you can enter them here. The FHA website makes it easy to determine if an association is already approved. If you do not find your association on the website, you can inquire about the status of the association. Some developments get turned down, while others just never applied for approval. Even if a development was turned down, though, it can reapply after the necessary changes or repairs were made to make it suitable for FHA financing.
Overall, FHA financing is not difficult to obtain on a condo. It is sometimes easier to gain approval on associations already developed and turned over as there is plenty of history for the FHA to use to determine their stability, but it is not impossible to get a new development approved.