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How FHA-approved condos work and how to qualify

Yahoo Personal Finance· Getty Images
6 min read

Condominiums, or condos, can be popular for first-time home buyers because they require less maintenance and are often priced lower than townhouses and single-family homes. But if you plan to finance your purchase with a mortgage insured by the Federal Housing Administration — an FHA loan — you’ll need to ensure the home you want to buy is in an FHA-approved condo.

Read more: How to choose between a condo and a house

In this article:

FHA loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). If the borrower defaults on their loan, the FHA pays the mortgage lender a portion of the loan balance.

FHA loans are popular with first-time home buyers and lower-income borrowers because they typically have more lenient down payment requirements, lower credit score requirements, and laxer qualification standards than conventional loans. The FHA wants to ensure that as few borrowers as possible default on their loans and that borrowers are purchasing safe homes.

An FHA condo approval helps the FHA check that the condo association maintains the property, has the appropriate insurance, and properly manages the community on behalf of the owners.

Learn more: Types of home loans for first-time home buyers

Before 2019, FHA borrowers could only finance their condo in a community approved for FHA loans. In 2019, the administration changed its procedures to allow borrowers to request an FHA approval for an individual condo unit.

Whether you’re buying a condo in an FHA-approved building or requesting FHA approval for an individual condo unit, you must fulfill the basic FHA loan requirements.

The FHA sets guidelines for mortgage borrowers, but some lenders may add their own requirements. You’ll need to consult an FHA lender for a loan preapproval to see if you qualify. Generally, FHA loan requirements include the following:

  • A credit score of 580 or above, although loans may be approved with a credit score of 500 if you have a 10% down payment.

  • A down payment of 3.5% with a credit score of 580 or above. Lower credit scores require a 10% down payment.

  • A debt-to-income ratio (DTI) — which compares your gross monthly income with minimum payments on all recurring debt — of 43% or less, although some lenders allow a higher ratio.

To be eligible for FHA financing, a condo association must meet the following requirements:

  • Proof of insurance for at least 100% of the building or community replacement cost.

  • Financial documents, including evidence of cash reserves of at least 10% of the association’s budget.

  • A physical assessment of the property for safety.

  • A maximum of 35% of the condo space is for commercial purposes.

  • At least 50% of units must be owner-occupied.

  • No more than 50% of the units may be FHA-insured.

  • A maximum of 15% of unit owners can be past 60 days delinquent on their condo dues.

If a building is not on the FHA-approved condo list, you and your lender can request approval for an individual FHA condo loan. The requirements for individual condo approval include the following:

  • The condo association must have at least five units.

  • The condo must not be a manufactured house.

  • The unit must be in a condo association that meets typical FHA condo requirements, such as the percentage of owner-occupants and the project's financial condition.

Read more: 12 types of houses to choose from

The fastest way to find an FHA-approved condo loan is to search the FHA-approved condo list on the HUD website. You can also ask a real estate agent to help you find a condo approved for FHA loans or to determine whether a unit you’re interested in buying has an FHA condo approval.

Condo associations are required to reapply for the FHA condo approval list every three years.

Before you commit to buying an FHA-approved condo, consider these pros and cons:

  • The FHA has reviewed the condo association for financial security.

  • It’s easier to qualify for an FHA-approved condo loan than another type of loan for a condo.

  • You can make a smaller down payment with an FHA loan than with some other loan programs.

  • A condo typically requires less maintenance than a single-family home.

  • Condos come with condo dues.

  • Condo associations can charge an unexpected assessment if repairs or special projects are required.

  • Not all condos are approved for FHA financing.

Read more: The pros and cons of FHA loans

If you find a condo you want to buy but it’s not an FHA-approved condo, you can purchase it with another type of mortgage loan (as long as you qualify). Here are some options:

Conventional loans are available for condos, but they typically require a credit score of 620 or higher. Conventional loans backed by Fannie Mae or Freddie Mac are available with a down payment as low as 3%, but if you put less than 20% down, you will need to pay for private mortgage insurance (PMI).

Read more: FHA vs. conventional loans

Not all VA lenders offer condo loans, but many do. If you are eligible for a VA loan due to your military service, you may be able to buy a condo with no down payment.

Learn more: FHA vs. VA loans

If you’re a lower-income borrower buying in a rural area, you may qualify for a USDA loan to buy a condo. USDA loans don’t require down payments.

Read more: FHA vs. USDA loans

Your real estate agent or mortgage lender can help you find out if the community you like has an FHA condo approval. You can also search the FHA-approved condo list on the U.S. Department of Housing and Urban Development website.

To earn FHA condo approval, the condo association must meet specific requirements. For example, 50% or more of the residents must be owners, no more than 15% of the owners can be more than 60 days delinquent on their condo dues, and 50% or less of the units may be financed with an FHA loan.

You can ask your real estate agent to find out if there is already an FHA condo approval request for the condo association. Your FHA mortgage lender can ask for FHA condo approval for an individual unit, or you can choose another loan program.

Not necessarily. It’s possible that the condo association has not applied for an FHA condo approval or has not reapplied after their last FHA condo approval expired. However, if a condo association has been denied an FHA loan approval, you may want to find out why. There could be financial issues with the condo association or inadequate insurance. In that case, you may not want to purchase a home there.

This article was edited by Laura Grace Tarpley.