Some house hunters are surprised to learn that FHA home loans are possible for condo units. There is an assumption that FHA loans are only for first-time home buyers looking for starter homes, but ANY financially qualified applicant can apply to buy a single unit home, a multi-unit property, or a condo unit.
FHA condo loans are similar in many ways to other purchase loans for suburban homes, but you should know the differences in buying and owning a condo versus other property types.
FHA Condo Loans And The Condo Project Approval List
FHA loans have requirements for condos or condo units–these usually must be on or added to the FHA approved list. Borrowers may look for an approved condo project using a tool on the FHA official site or discuss what it takes to add the project to the FHA approval list with a participating FHA lender.
Condo Loan Rules You Should Know
FHA Condo loans differ from buying a mobile home or a duplex (yes, you can use FHA loans to buy those properties, too). FHA loan rules published on the official site state that where condo projects have been converted from rental properties as opposed to being purpose-built as a condominium project, there may be mandatory waiting periods up to a year from the conversion to the loan application as well as other considerations.
Some condo projects don’t have to be on the FHA approved list in order to approve a purchase loan or mortgage for an individual condo unit that meets FHA loan requirements.
What are those requirements? From the FHA and HUD:
“To be eligible for Single-Unit Approval, the unit must be located in a project that is not FHA-approved, that is complete and ready for occupancy, has at least five dwelling units and it is not a manufactured home.” The project must also meet a list of other requirements including rules governing FHA insurance concentration, owner-occupancy percentage, and the “financial condition of the project.”
Condo Owner Association Bylaws Are An Issue
The home you buy with an FHA mortgage must meet FHA standards. One important area these standards apply in? Homeowner Association requirements. Don’t forget that condos (like some suburban neighborhoods) may feature homeowner’s associations or condo owner’s associations. You may be required to join such an association in order to purchase the condo unit.
Why is this important? Because covenants and bylaws of these associations may attempt to restrict the borrower’s ability to freely sell or transfer the property purchased with an FHA mortgage. This is not permitted under FHA loan rules.
Any language that would require an FHA borrower to submit the sale or transfer of their property to a third party for approval (such as a condo owner’s association) cannot be included — the condo owner’s association must amend its bylaws or otherwise render them free of “right of first refusal” clauses for the FHA borrower. Otherwise, the loan cannot be approved.