Why Should a Condo Get FHA Approved?

Have you ever heard of the term FHA condo approval and wondered what it meant? If so, you’re not alone.
What should buyers and sellers know about FHA condo approval requirements? Plenty!
First and foremost, you should know that having FHA condo approval is super important.
If you can get one, an FHA loan is an excellent way to pick up a condo or townhome in today’s real estate market.
However, both condo buyers and sellers are often unaware of everything that goes into the FHA loan process and just how difficult it can be to land an FHA loan on a condominium.
The bar is set high, and both buyers and sellers should educate themselves on the FHA process – for sellers to be more marketable to prospective buyers and buyers to take advantage of these low down payment loans.
By the time you’re done reading, you’ll have a complete understanding of why have FHA condo approval is so vital.
A condo project without being FHA approved can suffer greatly.
Condominium buyers are forced to get conventional loans, eliminating a significant financing option.
The impact can certainly be felt, especially with first-time buyers who count on the ability to get an FHA home loan.
What is an FHA Loan?
For those who are not familiar with the term FHA loan, it stands for the Federal Housing Administration.
Essentially it is a government-backed loan that allows those borrowers who have not saved a substantial amount of money but otherwise have good credit and stable employment to get financing.
One of the first options for getting a bad credit loan is the FHA. The minimum credit score is lower.
Perhaps the most significant attraction of FHA financing is FHA borrowers only need to have a down payment of 3.5% of the purchase price. Any real estate agent who has been in the business long enough can tell you just how popular this type of financing can be.
Without FHA certification, selling a condo can be much more challenging, as you will soon discover. Borrowers should know there is one drawback to this type of loan: paying FHA mortgage insurance.
Unlike traditional mortgages, there are two types of mortgage insurance. Condo buyers will pay an upfront fee of 1.75% of the loan amount in addition to an annual fee that ranges from .45%-1.05%. With this fee, your mortgage payment will be higher.
PMI (private mortgage insurance) also affects your monthly payments with traditional mortgages as well when you don’t have a twenty percent down payment. For this reason, it’s essential to get rid of it as soon as you’re able.
Why FHA Condo Approval is Vital For Sellers
As a seller, you may be wondering why a condo should get FHA approved? The answer is a simple one – you want to achieve the maximum return on your investment!
Having FHA mortgage approval increases the odds selling your condo will happen quickly and for a price at least around the average market value – and hopefully above that.
This is challenging to do, though, as anyone who has sold condos can tell you. The condo market can be more fickle than most, and you can find yourself in a difficult situation if you do not remain aware of how the market works.
As a seller of a condominium, having your neighborhood approved for FHA financing is critical.
Without FHA approval on your condominium, you lose the potential of a substantial amount of buyers who otherwise would not have the down payment necessary to purchase.
Never underestimate the importance of having an FHA-approved condo!Click To TweetCheck on Whether Your Condo is FHA Approved Before Selling
I can remember not that long ago while doing my due diligence for a condo complex in Milford, Massachusetts, the owner of the condominium thought that they were FHA approved. While double-checking on this, it was discovered that the condominium association allowed the approval to lapse.
After hearing me explain what a detriment this was to not only her property value but everyone else who lived there, the owner decided it made perfect sense to get re-instated.
Of course, she had to convince those on the homeowners association that it was well worth the money to do so.
Luckily for her, she was able to persuade them. This was a case of a condo association putting their collective heads together and realizing that having an FHA-approved complex was extremely important.
FHA Condo Approval Matters
When your condo complex meets FHA requirements, it automatically opens up your sale to a significant number of buyers.
Home buyers with lower down payments want to own a home, and they can do so with an FHA-approved loan.
Having FHA approval matters to you because without FHA condo approval, your property remains unavailable to this vast number of buyers ready and willing to give you the money you want for your home.
With an FHA loan, a buyer can purchase a condo with only a 3.5% down payment. This is significant because plenty of customers have high incomes but have not saved a substantial down payment.
An FHA mortgage allows them to purchase with a lower down payment than with most conventional mortgages.
What Are FHA Condo Approval Requirements?
FHA approval matters for another reason as well. Even if your buyer has an infinite amount of income, it will likely not fetch as high of a value as those that do if your condo complex does not meet FHA requirements.
The reasons for this are straightforward.
For the most part, FHA demands are reasonable requirements, things that any good investor would want from their property.
Demanding secure homeowners, decent cash reserves for the association, and a sound legal situation are all reasonable things, especially when considering dropping large sums of money towards a particular purchase.
You want your condo and your complex to meet these requirements, especially if you want to get top value for your property. It may be a cumbersome process to go through, but it will be well worth it in the end if you plan on selling for top dollar.
Exact Requirements
To have FHA approved condos, the following requirements must be met:
- In a condo with 10 or more units, only ten percent of the units can be FHA-insured. A condo building that has less than 10 units can only have 2 units with an FHA loan.
- Fifty percent of the units must be owner-occupied.
- 85 percent or more of the individual units must be current on their condo association dues.
- The condo project must have proper insurance and have at least 10 percent of the HOA budget in cash reserves.
- Not more than 35 percent of the project can have commercial space.
- For the condominium project approval to remain current, it must be recertified every three years. The recertification process will include an FHA review.
The eligibility requirements must be maintained, or condo communities will lose their approval.
Are you beginning to realize why you should get a condo FHA approved? Following FHA condo loan rules is worth it!
Difficult FHA Standards
Keep in mind that a decent percentage of condo complexes do not meet FHA requirements. Some have never applied for FHA approval, and others have let the approval lapse.
From a homeowners perspective, this is not something you ever want to let lapse. Unfortunately, condos are not like single-family homes where you rule the roost.
You are governed by a majority of people making decisions on your behalf. While you may have a voice, sometimes it is easy for things to fall through the cracks, and you may be aware that your neighborhood is no longer FHA approved.
At times the folks in charge of running the show do not fully understand how much this approval can affect market values.
Then again, you could be caught in a situation where a few thick-headed people running the show are clueless.
You know the type – they sit around all day thinking up new rules regulations to feel like they are self-important and make others miserable.
Being FHA Approved is Less Important in Hot Seller’s Markets
You can sell a condo that does not meet FHA requirements. However, like any other property that is not perfect, you must rein in your expectations on how much you can get and how quickly you can unload it.
When the housing market is on fire, and there are numerous bidding wars, it won’t matter nearly as much.
However, when market conditions change to a buyer’s market, having a condominium unit with FHA approval could be important.
Condo owners will have to find a buyer who does not need an FHA loan and is not as picky about the property they are purchasing.
Your condo may have a high number of renters – something the FHA does not like – or it may have a problem right now with homeowners who are late on their payments to the association. Or, you may be unlucky enough to be in a situation where there is ongoing litigation against your particular organization.
If your association falls into any of these problem areas, you may still be able to sell your home. However, it may not command top dollar, and you should be prepared for this.
If you have the option to wait until the problem is resolved, such as with delinquent homeowner’s association fees, it may be best to do so. If you want top dollar, you should seek FHA approval.
Go ahead and explain to the board members why this is so important. In fact, show them this article to understand how critical it is to their property value!
Why FHA Condo Approval For Buyers Matters
There are many reasons to choose an FHA-approved condo, not the least of which is the possibility of a small down payment loan.
FHA approval requires adherence to some quality control requirements that few associations can meet.
National Mortgage News claims that up approximately 60 percent of associations are denied approval from the FHA, a serious vetting process that cuts no corners in its demands on condo associations.
The FHA only wants to loan money on properties considered a sound investment, and these requirements are deemed necessary to guarantee such investments reasonably.
By purchasing a condo that is eligible for an FHA loan, you have allowed the government to do much of the work to guarantee your investment.Click To TweetKnowing The Association is Financially Stable
Not only have you managed to get a good loan towards your purchase, but you have also ensured that the majority of the people living in your condo association will be owners and will be current on their association dues.
Perhaps even more important, you will guarantee that your condo association has reserves of cash that are at least equal to a year’s worth of fees from the association. This means that when something goes wrong, that affects the whole complex, such as roofing issues or flooding problems, your association will have the money to address those problems.
As a bonus, your association is guaranteed to be free of legal problems as of the time of your purchase. When you have invested with numerous other individuals in a property, this can make a big difference.
When any buyer is considering purchasing a condo, they should ask some important condo questions before purchasing. Finding out the answers to these issues can save a lot of heartburn somewhere down the road.
While there is a natural progression from some who have owned single-family homes to want to opt for condominium living, they often forget just how different it will be when they are no longer king of their castle.
What is The FHA Condo Approval Process?
Now that you know why it is crucial to have FHA condo approval, let’s review the process for getting a condominium project approved. Understanding how to get FHA condo approval will be crucial for being done in a timely fashion.
If you are an FHA buyer wanting to finance or get a reverse mortgage within the condominium association, the entire development will be to have FHA approval.
The process will start by gathering documents needed by the FHA to grant approval.
Documents Needed For The Condo Approval Process
- The recorded covenants, conditions, and restrictions.
- Adopted bylaws signed and dates by board members.
- Articles of incorporation filed with the state.
- A copy of the current budget.
- A recent income statement and balance sheet
- An income statement or audit from the prior year.
- The current insurance policy including hazards and liability.
- Fidelity bond declaration aka employee dishonesty policy.
- A signed management company agreement unless self-managed.
- The list of rented units in the condo community.
How Much Does FHA Approval Cost?
The cost of getting an entire complex certified depends on the following:
- A condominium that has never been approved will cost $850.
- A condo that has expired approval over six months will also cost $850.
- Condos that are not expired but will be up for renewal soon will cost $765.
- A condo that has expired bur for less than six months will also be $765.
- New construction units that are less than a year old will be $1500.
As you can see, the cost of FHA condo approval can vary, so it is essential to check the current status.
How Long Will FHA Condo Approval Take?
The time frame it takes to get FHA condo approval is usually around two to four weeks. A significant factor will be how quickly the property manager or condo association gets the required documents back.
The current eligibility of the condo community and the current workload of the FHA will also be factored in the timeliness of the approval.
The process should be started right away, so the time to close is not impacted.
How Long Will The Approval Last?
FHA certifications last for 3 years. During this time frame, condo buyers will be able to get an FHA-insured loan either for purchasing or refinancing. A reverse mortgage or HECM loan will also be possible.
What is The FHA Condo Renewal Process?
In order to get a condo recertified, it must go through the HUD review and approval process. Once the condo project is recertified the approval will be good for two years.
Approval needs to be renewed because the status of the condos and their occupants can change. For example, things such as owner-occupied vs investor ratios can change. The budget can change. The number of owners who have not paid their condo dues could have changed.
These are just a few of the examples of why condominium recertification is needed.
What is The FHA Condo Approval List?
The FHA condo approval list is documentation of the condominium projects that the FHA has approved.
FHA condominium loans can be utilized for the purchase of any individual condo units with approval.
The list of FHA-approved condos can be found by visiting the HUD website. This is the official site for determining FHA eligibility.
The loan officer or lender you are working with should also be able to assist.
As a borrower, finding out the approval status upfront will be essential, so you’re not wasting time.
What is Single-Unit Condo Approval?
Years ago, you could get spot approval on a single condo unit in a condo project that did not have FHA approval. Today, it has been replaced by what’s known as a single-unit approval.
Single unit loans are available for those who qualify. The FHA single-unit approval program allows a borrower to get financing without the condo project obtaining FHA certification.
Even though the HOA doesn’t have to get FHA approval under the program, it still must qualify.
To get single-unit condo approval, the FHA condominium loan-level single-unit questionnaire will need to be filled out. The documents are known as questionnaire HUD-9991.
The single-unit approval process is overseen by The U.S. Department of Housing and Urban Development.
In order to qualify, the condo must be in a project that isn’t FHA-approved, is complete, and is ready to be occupied. The project must also have five or more units and not be a manufactured home.
The Federal government has made this kind of financing easier with the FHA single unit approval program.
What About VA Loans?
You may be wondering if there are approval requirements for a VA loan as well? The answer is yes. A while ago, the FHA and VA had a reciprocal approval agreement. That is no longer the case.
The Department of Veteran Affairs will review condo docs and bylaws to investigate any potential conflicts. The goal will be to make sure veterans are not buying in overly restrictive projects that will make selling difficult.
The following should be understood about VA loan approval for condos:
VA condo approval is not the same and separate from FHA. It typically takes around 40 days to get VA condo approval. The cost is 850. VA condo approval will not expire – it’s a lifelong approval.
Final Thoughts
The endorsement of the FHA for condo associations matters, both to buyers and sellers. If you are selling, you want top dollar for your property. If you are a buyer, you want the best you can buy for the money.
FHA certifications guarantee both of these and should be a priority for both buyers and sellers. Hopefully, you have concluded that FHA condo approvals matter to both buyers and sellers!
More FHA Condo Resources
- What are the benefits of an FHA loan – See why FHA is such a terrific loan program.
- A guide to understanding all there is to know about FHA loans by HUD.GOV.
Use the additional resources to learn more about why having an FHA-approved condo is so important!
About the author: The above Real Estate information on why FHA condo approval is so important for buyers and sellers was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.


Documents Needed For The Condo Approval Process
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