March 23, 2018
In our last blog post we began examining FHA loan rules and how they differ whether you are buying a suburban house, a condo unit or townhouse, etc. When you buy a typical suburban home, the credit check/appraisal/downpayment issues are the same as for condo units and townhouses.
But when you buy a home such as a condo or townhouse, you’re required to pay more attention to common areas and agree to your share of the maintenance/upkeep of the property in general.
FHA loan rules recognize these issues and addresses some (not all) of them in the FHA loan handbook to avoid confusion about what the borrower is required to do and cases where FHA loans are not allowed because of restrictions on the borrower’s ability to sell the home.
FHA Loan Rules For Townhouses and Condos
FHA loan rules permit borrowers to purchase different types of property besides the typical house in the suburbs. Townhouses and condo units may also be purchased with an FHA mortgage. Depending on the nature of the townhouse, you may or may not need to discuss homeowner association agreements (HOA) or covenants with the lender-these will, where present, definitely play an important part in approving or denying the FHA mortgage application.
While townhouses are not specifically referred to in HUD 4000.1 as often as condo units, some of the same requirements would apply to the purchase of a townhouse with FHA loan funds. No FHA loan transaction may restrict the borrower’s ability to freely sell the property, so HOA contracts for the FHA borrower must be free of clauses such as the Right of First Refusal or other restrictive covenants that attempt to regulate how and when the property may be sold.
FHA loan rules say that condo units can be purchased with an FHA loan if the condo project is either on or added to the FHA approved condo project list. If the condo is not on the list, speak to your loan officer about how to go about getting it considered for review by the FHA.
Condo units and FHA townhouse loans alike share the same basic appraisal, occupancy, and down payment requirements as any other FHA mortgage. Condo unit buyers will be required to pay the same amount down (3.5% minimum) and are required to pass a credit check. Lender standards, state law, and other regulations may affect all FHA home loan transactions including these.
But purchasing a condo unit also means signing legally binding paperwork with the condo owners’ association; the borrower may be required to share responsibility for maintaining or paying for maintenance of common areas, roof issues, etc.
When buying a condo or townhouse with an FHA mortgage, it’s important to remember that not all lenders offer all the available FHA home loan options. If your chose lender does not offer an FHA townhouse or FHA condo loan, that doesn’t mean you can’t get one guaranteed by the FHA. It just means your participating lender opts not to offer those loans.
Remember that certain requirements applicable to FHA condo loans (but not suburban houses) may end up applying after all for certain kinds of townhouses. A property may look like a townhouse, but if it is configured as part of a larger project that can legally be classified as a condominium, the physical appearance of the property won’t affect its’ standing as a condo project.
That may seem unnecessarily confusing, but remember that condo projects require addition to the FHA approved list whereas properties that are classified as townhouses may not be automatically grouped with condos. Townhouses don’t have the same kinds of rules for common areas, shared expenses for roofing/plumbing/etc.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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