Owning a home is a fundamental part of the American dream.
So, if you’re considering buying a condo and are wondering how to finance it, the FHA loan can be the best option.
This article discusses everything you need to know about buying a condo using an FHA loan. We will go through the requirements, pros and cons, and what to look out for.
By the end, you should have clarity on whether an FHA loan is the right choice for you, and how you can get through the mortgage process successfully.
What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This means that if you default on your loan, the FHA will pay the lender back.
Because of this insurance, lenders are more willing to offer loans to borrowers who may not qualify for conventional mortgages.
FHA loan requirements generally have more flexible requirements and will accept lower credit scores or down payment amounts than conventional loans.
What is a Condo?
A condo, short for condominium, is a type of residential property similar to an apartment but is individually owned.
In a condo, you would own your individual unit and also share ownership of common areas and amenities, such as hallways, elevators, and recreational facilities, with other owners in the same building or complex.
The owners of a condo also typically pay monthly fees to the condo association, which is responsible for the upkeep and maintenance of the common areas and amenities.
Can You Buy a Condo with an FHA Loan?
Yes. Not only can you buy a condo with an FHA loan, but it can be the best option for you – especially if you don’t qualify for a conventional mortgage.
However, there are some additional requirements for buying a condo with an FHA loan, including the FHA insisting that the condo is on their approved list and the condo association meets certain financial stability and insurance requirements.
Let’s dive into the requirements you and your condo will have to meet to get approved for an FHA loan.
What are the Requirements for an FHA Loan?
Before we talk about the requirements specific to condos, let’s first lay out the general FHA loan requirements.
You and your condo will need to meet these requirements to be eligible for an FHA loan. The homeowner requirements also determine how much loan you qualify for.
Homeowner Requirements
- Credit Score: 500 and above
- Down Payment: 10% if credit score is between 500-579 and 3.5% if credit score is 580 or higher.
- Debt-to-Income Ratio: 43% or below
- Income Requirement: No official minimum or maximum requirements
- Mortgage Insurance: You MUST get mortgage insurance. Your upfront mortgage insurance premium (MIP) is 1.75% of your loan. Your monthly or annual insurance premium is determined by your lender and your other qualifications.
Property Requirements:
- Property Conditions:
- Safety – Home must be in a safe environment
- Security – Home must be able to offer protection for its occupants
- Soundness – The home should have no structural defect
- Location: Home must be located in the continental U.S, U.S. Puerto Rico, Guam, American Samoa, the Commonwealth of Northern Mariana Island, or Virgin Islands
- Appraisal: The home should be appraised by an FHA-approved appraiser. They will check the conditions of the home as well as the value of the home.
FHA Loan for Condo Requirements
In addition to the general requirements for an FHA loan, there are some additional requirements for buying a condo with this loan type. These requirements include:
- Condo must be FHA approved: The FHA has a list of approved condos that meet their guidelines.
- Owner-occupancy requirements: At least 50% of the units in the condo project must be owner-occupied. That is, not rented or used as vacation homes.
- Financial stability of the condo association: The condo association must have adequate reserves and financial stability to ensure that it can maintain the property and make any necessary repairs.
- Insurance requirements: The condo association must have adequate insurance coverage, including hazard and liability insurance.
Pros and Cons of Buying a Condo with an FHA Loan?
Buying a condo with an FHA loan can have both benefits and drawbacks. Below, we’ll take a closer look at some of the pros and cons of using an FHA loan to finance the purchase of a condo.
Pros
- Lower down payment: One of the biggest advantages of using an FHA loan to buy a condo is that it allows for a lower down payment than conventional loans. While conventional loans typically require a down payment of at least 5%, FHA loans may only require a down payment of 3.5%. This makes it easier for first-time homebuyers and those with limited funds to purchase a condo and start their homeownership journey earlier than they otherwise would have.
- Lower credit score requirements: FHA loans are also more accessible to borrowers with lower credit scores than conventional loans. While conventional loans may require a credit score of 580 or higher, FHA loans may be available to borrowers with credit scores as low as 500. This is helpful if you do not have a long credit history or who have had credit issues in the past.
- More flexible debt-to-income ratios: FHA loans may also be more flexible when it comes to debt-to-income ratios. While conventional loans typically require a debt-to-income ratio of 45% or less, FHA loans may allow for a ratio of up to 50%. This is especially beneficial if you have other debts, such as student loans or credit card debt.
- More affordable: Condos are generally more affordable than other single-family homes. Their pricing varies widely depending on the location, size, and condition of the property. However, in suburban or rural areas, single-family homes may be more prevalent and less expensive than condos.
Cons
- Additional requirements: As mentioned earlier, there are additional requirements for using an FHA loan to purchase or refinance a condo, such as a requirement that the condo is on the FHA-approved condo list and that the condo association meets certain financial stability and insurance requirements. This limits the pool of available properties and makes the purchasing process more complicated.
- Condo recertifications: If a condo meets all the requirements set by the FHA and gets approved, it will still need to be recertified every 2 years. This is an extra cost of money and time.
- Mortgage insurance: FHA loans require mortgage insurance, which can increase the overall cost of the loan.
It’s important to weigh these pros and cons carefully as you consider an FHA loan. Work with us and we can guide you through the process and answer any lingering questions you may have.
Why Do Some Condos Not Accept FHA Loans?
Considering the great benefits of an FHA loan, it may be surprising to discover that some condos don’t accept FHA loans, but there are actually some pretty valid reasons.
Here are just a few reasons some condos may shy away from this loan type.
- Additional requirements: While these requirements are put in place to protect both the buyer and the lender, they can be more stringent than what some condo associations are willing or able to meet.
- Low-quality buyers: Some condo associations may have restrictions on the use of FHA loans because they believe that FHA loans are associated with lower-quality buyers, which could potentially impact property values within the complex.
- Owner occupancy requirement: In order for a condo complex to be eligible for FHA financing, at least 50% of the units must be owner-occupied. If the owner-occupancy rate falls below this threshold, the complex may not be eligible for FHA financing. Condos in areas popular for vacation homes or rentals are unlikely to meet this threshold.
- Additional paperwork: Some condo associations choose not to accept FHA financing to not want to deal with the additional paperwork and requirements from this type of financing. The process can be more involving than other types of financing, which can be a turn-off for some sellers and associations.
Frequently Asked Questions
What is the FHA concentration percentage?
The FHA concentration limit for condos is 10%. This means one investor cannot buy more than 10% of the units in a complex if the complex wants to be FHA certified.
There are however exceptions for condos with a small number of units.
Is an FHA mortgage for a condo different from that for a house?
Yes, an FHA mortgage for a condo can be different from that for a house. Condos must be in an FHA-approved project, which may have more stringent requirements than a single-family home. Additionally, the down payment requirements and lender restrictions may differ for condos versus houses.
Are condo fees separate from a mortgage?
Yes, condo fees are separate from a mortgage. Condo fees are monthly or annual payment that covers the costs of maintaining and managing the common areas and amenities of a condominium complex or building. A mortgage is a loan used to purchase a property. These two payments are separate and paid to separate entities.
What is the minimum credit score required for an FHA loan?
The minimum credit score required for an FHA loan is typically 580. However, borrowers with credit scores between 500 and 579 may still be eligible for an FHA loan, but they will need to make a larger down payment (at least 10% of the home’s purchase price) to qualify.
Talk to your local lender or speak to us if you’re considering a condo in any of these areas to learn more about the credit score requirement.
What are the benefits of using an FHA loan to buy a condo?
The benefits of using an FHA loan to buy a condo may include lower down payment requirements, lower credit score requirements, the ability to finance repairs or improvements using the 203k loan, and competitive interest rates.
Should I Buy a Condo With My FHA Loan?
Yes, you may buy a condo with your FHA loan. If you’re considering it, then you must have your reasons. You just must ensure that you and your condo meet the required requirements.
The best way to get a definite answer for your condo’s eligibility is to check the list of FHA-approved condos.
If your condo is listed, and you meet all the requirements for an FHA loan, it may be time to reach out to us to get the FHA loan ball rolling.
Also, give us a call if you have any lingering questions.
