I hate it when my condo buying clients send me a listing they are interested in, and I have to tell them we can’t look at it because that particular complex is not FHA approved. Breaks my heart. It’s good for potential condo buyers to get an understanding on what the basic requirements are for a condo complex to be FHA approved.
As I was researching for this topic, I came across a great arctile from Daniel Duffield at Lender411.com. It’s a great post that describes the basic FHA condo approval requirements. So, in an attempt to work smarter and not harder, I am re-posting their article with their permission. Definitely check out Lender411.com for more information on loans, get rate quotes, or ask a loan question.
FHA Approved Condos
By Daniel Duffield via Lender411.com
FHA Approved Condominums are properties best suited for first time homebuyers since many such borrowers cannot afford a sufficient 20% down payment amount and usually opt for FHA loans, which allows them to finance up to 96.5% of the total loan value.
However, as the name implies, the condo must be approved by the Federal Housing Administration (FHA Approved Condo), with no exceptions.
Basic FHA Condo Approval Requirements
When considering the requirements for FHA approved condos, the FHA will consider several key factors, the three most crucial requirements being:
Ratio of homeowners to investors. In order to receive approval, the ratio of homeowners to investors cannot be less than 50%; in other words, investment properties cannot exceed 51% of the homes.
Number of delinquent HOA fees. No more than 15% of homeowners may be delinquent their Homeowners Association fees to be approved.
HOA fees in reserve. Typically, the Federal Housing Administration will require that the Homeowners Association have a minimum of one year in HOA fees saved in reserves, though most decent HOAs will already have satisfied this requirement.
If one of these qualifications is not met, the FHA will not approve the condo project.To verify whether a condominium project has been approved for FHA financing, search HUD Condominium listings for more information.
FHA Approved Condo Advantages
For many first-time homebuyers, condo purchase can be an excellent investment, as a much simpler and more affordable alternative to home purchase. As such, FHA condominiums can be even more beneficial, providing low to moderate income borrowers with access to incredibly affordable FHA mortgages with minimal down payments.
In addition, due to the increasing popularity of the FHA mortgage program, FHA condominium approval has become an asset in itself, as an overwhelming majority of borrowers turn to FHA mortgages when financing condo purchases. As such, sellers of condominiums with FHA approval will have a tremendous advantage over other condominium sellers, having a much greater range of borrowers whom would be willing to purchase the property. By losing the majority of buyers due to a technicality, homeowners with condos not approved by the FHA will only find buyers who are investors, searching for the cheapest deals, a small minority of first-time homebuyers with a 20% down payment, and a small portion of retired borrowers hoping to buy down. With a significantly wider range of borrowers, FHA-approved condos have seen an increase in demand, pushing the value of these properties upward.
FHA Condo Approval
In order for a FHA condo approval, the Board of Directors for the condo complex’s Homeowners Association must contact the FHA approval company. While approval typically includes a fee of approximately $2,000, it is well worth the potential value increases of the condos, if not to avoid the potential losses through devaluation by receiving approval.
As the fiduciary, the Board has the responsibility to ensure that their condominiums are as eligible for sale as possible; however, often the HOA management company keeps the Board informed with these rules and regulations and will skip this approval in order to save time and money, neglecting to mention it to the Board or else misrepresenting the issue.
While this can save some immediate trouble for the company, skipping FHA approval can critically diminish the value of the properties. As such, borrowers hoping to purchase a condominium should always inquire as to whether or not the property has been approved by the FHA.
How can I get my HOA to obtain FHA approval?
If you live in a condo project that has not been approved and would like to get approval, speak with your neighbors and discuss this opportunity; many condo owners may not be aware of the substantial benefits of FHA approval. In addition, raise the issue at the next Homeowners Association Board meeting and specifically request for immediate FHA approval. Since FHA approvals can expire, many Boards may not be aware that they are not approved, and management companies may neglect to present this issue.
FHA Condo Approval Expiration
When the Federal Housing Administration grants approval for a condo complex, this carries an expiration date, at which time the project must either recertify or stop accepting FHA funding for condo purchases. Basically, in order to retain FHA approval on the complex, the Board is responsible for resubmitting an approval application before the approval expires.
To find out when your association’s FHA Certification expires, visit the HUD website.
FHA Condo Streamline Refinance
Condo owners holding FHA mortgages may be eligible for an FHA streamline refinance, provided that the condo complex retains its FHA approval; if approval has expired, the borrower will be unable to refinance through the FHA, streamline or otherwise, although he or she may still enact a conventional refinance. If you cannot refinance due to approval expiration, discuss the issue with your neighbors and your HOA Board and request immediate FHA approval.
Why FHA Approved Condos?
With a shift in borrowers toward the FHA, the condominium market has been affected, with FHA approved condos growing notably in value.
In terms of condominiums, the majority of buyers are making a first time home purchase. As a result, many have not saved a sufficient 20% down payment amount to warrant securing a conventional mortgage loan without private mortgage insurance. Instead, these first time homebuyers opt for FHA loans, which can finance up to 96.5% of the total loan value. However, in order to purchase an FHA approved Condo, the condo must first have been approved by the Federal Housing Administration; this rule does not have any exceptions.
By losing the majority of buyers due to a technicality, homeowners with condos not approved by the FHA will only find buyers who are investors, searching for the cheapest deals, a small minority of first-time homebuyers with a 20% down payment, and a small portion of retired borrowers hoping to buy down. Consequently, FHA-approved condos can be purchased from a significantly wider range of borrowers, making the demand higher and pushing the value upward.