Can I use my FHA loan to buy a Condo?
There are many different types of FHA loans available for borrowers who want more options than a typical suburban home. Many types of properties may be purchased with an FHA insured mortgage, including manufactured homes, multi-family units, and condominiums.
We have written about FHA condo loan rules in the past, but since the release of HUD 4000.1, the revised and updated FHA Single Family Home Loan Handbook, another look at FHA condo loan rules under the revised guidelines.
FHA Condo Loans Feature Unique Requirements
FHA condominium loans can be more complicated than some other types of new purchase real estate loans due to the FHA has requirements places on condo projects. These factors shouldn't discourage a borrower from exploring their FHA condo loan options, but it's important to be aware of the rules in order to save time and begin the search for a new home in the right place.
In order for a given condo to be approved for an FHA home loan, it must be on (or added to) the FHA's list of approved condominium projects. FHA publishes a searchable list of approved condo projects on its website. This link has not expired since the publication of HUD 4000.1. Borrowers and lenders can use the search tool on this page to find condo projects that are on the FHA approved list.
What criteria must a condominium project meet to be included on that approved condo project list? FHA guidelines state, "to be eligible for FHA mortgage insurance, the project must have been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located and with all other applicable laws and regulations."
“FHA insures condominium single unit loans for up to 30-year terms to purchase or refinance a unit in an FHA-approved condominium project. The condominium project must be primarily residential, contain at least two dwelling units and can be detached, semi-detached, a row house, a walk-up, mid-rise, high-rise, including those with or without an elevator, or manufactured housing.” That is a quote from the FHA/HUD official site.
Any part of the condo which is used commercially must conform to typical FHA rules which require business use of the property to be subordinate to the residential nature of the space. Business or other non-residential use of the property to be secured by FHA loans in general are subject to the following rule in HUD 4000.1:
“The non-residential portion of the total floor area may not exceed 49 percent.” That information is found on page 487 of HUD 4000.1.
Some properties are not eligible due to the nature of the project. For example, "condo hotels" are not allowed on FHA approved condo project list. Also forbidden--timeshares, houseboat projects or condos that feature more than one dwelling in a single condominium unit.
Condo projects may not be FHA approved if they contain restrictive requirements, agreements, or covenants that prevent the owner from freely disposing of the condo unit at any time. The “right of first refusal” clause in some condo owner association agreements can be problematic for FHA borrowers.
If you want an FHA condo loan, FHA encourages the use the approved condo list as a way to start searching for the right building your area. The HUD search tool lists approved condo projects by condo name, state, zip code and other factors.
A condo project that is not currently on the approved list may be added with the help of your participating lender-speak to a loan officer about what may be required.