The Federal Housing Administration requires condominium communities, and not individual unit owners, to meet certain requirements for its insured loans to be extended to buyers. So, when you apply for an FHA-insured loan to buy a condo, the lender will request information directly from the condo's management office to confirm that the community meets the criteria. These requirements may change periodically, depending on market conditions.
The Department of Housing and Urban Development has established guidelines to ensure that condominium communities are financially stable and well-managed, a process that protects mortgage lenders from rampant loses. A buyer wishing to take advantage of the low down payment qualification of government-backed funding for the purchase of a condominium must buy in an FHA-approved community. Being FHA approved increases a community’s profile with lenders, helps maintain the value of the units and makes it easier for owners to sell and refinance.
Qualifying for FHA Approval
While extensive, the paperwork submitted to attain FHA approval must include proof that at least 10 percent of the community’s annual budget has been set aside as reserve funds. Owners must occupy at least 50 percent of all the units and a single investor may own no more than 50 percent of the units. Past due delinquencies may not exceed 15 percent of the total units, and they may not be more than 60 days delinquent.
Causes for Concern
If a community has recently issued a special assessment to raise funds, it raises a red flag. It’s not grounds for denial, but the situation requires disclosure and an explanation. Construction defects and any pending litigation harm a community’s chances for FHA approval success. Commercial space within a condo community may not occupy more than 35 percent of the total square footage and mixed use communities with up to 50 percent of the total square footage dedicated to commercial usage must provide additional documentation to HUD.
Term of Acceptance
Once a community has been FHA approved, it must maintain its standing by applying every two years for a continuation. While the process duplicates the original application procedure, plans are being explored to streamline recertification.