FHA-approved condos: The approval process and where to find them

Buying a condo with an FHA loan is possible, but not all condos qualify. Properties must meet FHA requirements to be approved, and finding qualified units can be challenging for buyers. This guide breaks down what earns FHA approval for a condo and explains how to navigate FHA loan options to find the right property meets your needs.

What is an FHA-approved condo?

An FHA-approved condo is one that meets those standards and that you can purchase using an FHA loan. In order to receive approval for FHA loans, a condo community or single-unit residence will be appraised to make sure it meets FHA loan standards.

Once the community or single unit is approved, it receives a condo ID number. Prior to 2019, an entire condominium community needed to go through the approval process. With the rule change in 2019, individual condo units can be approved as well.

The Federal Housing Administration (FHA) is a part of the U.S. Department of Housing and Urban Development (HUD). HUD administers federal aid to local agencies that manage housing for low-income residents. The agency also backs home loans for many Americans through the FHA. An FHA loan is a mortgage insured by the FHA and issued by an FHA-approved lender.

How does a condo community get approved for FHA loans?

Condominium communities seeking FHA loan approval need to complete one of two processes:

• The HUD Review and Approval Process (HRAP)
• Direct Endorsement Lender Review and Approval Process (DELRAP) for lenders

The approval timeline depends on the original structure of the condominium complex. Older properties with a lot of special features could take longer to approve.

Once the condo community is approved through either process, the property receives a condo identification and submission number, which identifies it as one that can accept FHA-insured loans.

If a condominium community isn’t already approved, a borrower can initiate the process for a single unit. Approvals for an FHA-approved complex are more involved than the process for an FHA-approved house. In addition to the standard FHA appraisal safety checks, the financial viability of the condo development is evaluated because the communal resources are part of the total property value.

In order for a condominium project to receive FHA loan approval, the complex must provide:

• Proof of insurance coverage
• Paperwork outlining the property’s financial condition
• An assessment of the property’s physical condition
• Confirmation of any pending lawsuits

How to get a single condo unit FHA-approved

If you want to buy a condo in a community that isn’t already approved, you may still be able to get the single unit you’re interested in approved.

Single-unit condominiums have a different set of standards to meet to be approved by the FHA. Some of these requirements include:

• The condo project has at least five single-dwelling units
• The single unit is not a manufactured home
• The unit is ready for occupancy (it cannot be under construction)

Requirements of FHA loan approval for a condo

To qualify for an FHA-approved condo, you’ll need to meet the following borrower requirements:

• Credit score: Your qualifying credit score will need to be 500 or higher, but lenders may set their own requirements. Rocket Mortgage requires a median credit score of 580¹.
• Down payment: FHA-insured loans require a down payment of 3.5% for borrowers with a credit score of 580 or higher. If your score is between 500 and 579, you’ll need to make a 10% down payment.
• Debt-to-income ratio (DTI): The DTI requirement for an FHA loan typically depends on your lender and your credit score. Most lenders require a DTI of 43% or less.
• FHA mortgage insurance premium (MIP): You’ll have to pay an FHA MIP when you take out an FHA loan. There’s an upfront MIP payment that’s equal to 1.75% of the loan’s value, and you’ll also pay an annual MIP that depends on your loan-to-value ratio (LTV), down payment amount, and mortgage term length.
• Primary residence: The condo must be considered a primary residence, or a home you live in for the majority of the year.

FHA condo approval restrictions

Condominium FHA approvals come with restrictions designed to approve communities and units that will maintain or increase in value over time. These are some baseline requirements:

• The condo must be completed, or at least complete its current phase of construction, not just proposed.
• In communities with at least 10 units, up to 50% of the units can be FHA-insured. For communities with fewer than 10 units, only two units can be FHA-insured.
• At least 50% of all units must be owner-occupied.
• The condo association must keep at least 10% of the HOA budget in a cash reserve.
• At least 85% of the units must be current on their condo dues, with limited exceptions for properties where a reserve study has been done.
• No more than 35% of the property can be used for commercial purposes.
• The community or individual unit must be recertified every 3 years to ensure it still meets the requirements

How to find FHA-approved condominiums

You can find the FHA-approved condo list through HUD’s approval list website. Simply input the state and county where you are interested in purchasing a condo. You can search for already-approved communities or those that have been submitted and are awaiting approval.

If you’ve already found a condo you love, you can check the HUD website to see if it has been through the approval process. You may need to contact the condo association to see if a condo ID is available and whether the application process has started.

The pros and cons of FHA-approved condos

FHA loans have more flexible borrower requirements than other loan types. However, there are also some downsides to financing a condo with an FHA loan. Let’s recap some of the pros and cons of FHA loans for FHA-approved condos.

Pros

Some reasons to consider an FHA-approved condo include:

• Flexible loan terms and lower interest rates
• Lower down payment requirements than other loan options
• Government ownership of your loan rather than ownership through a private lender

Cons

FHA-approved condos aren’t right for everyone. Make sure you keep these drawbacks in mind.

• Required upfront and annual MIP payments
• FHA-approved condos need to be recertified every 3 years
• There’s a limited supply of FHA-approved condos for potential buyers

Alternative condo loan options

It can be disappointing when you find the perfect condo, but it’s not approved for an FHA loan. Speak with your lender to see what other condo loan options are available to you. Let’s walk through some common mortgage alternatives.

• Conventional loans: A conventional home loan is a mortgage option that can be used to buy a condo with as little as 3% down. Keep in mind that conventional loans require private mortgage insurance (PMI) with a down payment of less than 20%.
• Veterans Affairs (VA)-approved condo loans: Eligible borrowers may also be able to use a VA loan to finance a condo purchase. However, not all lenders allow for this property type. Check the specific borrower and property eligibility requirements with your lender before applying.
• Fannie Mae and Freddie Mac condo loans: You may be able to finance a condominium through either the Fannie Mae HomeReady^® or Freddie Mac Home Possible^® 2 loan program. You’ll need to meet specific credit score, down payment, and other loan requirements to qualify for the HomeReady^® or Home Possible^®.

FAQ

Depending on your situation, an FHA loan may be the best option for financing your condo purchase. Let’s explore some questions about FHA loans for condos.

Why does a condo need to be approved for an FHA loan?

Condos must be approved by the FHA before qualifying for an FHA loan because the FHA wants to ensure they will serve as sufficient collateral for the loan.

Since an FHA loan for a condo is backed by the FHA, the agency wants to be certain the community and the unit will maintain their value. FHA loans have more lenient borrower requirements than other types of loans, which can pose some level of risk for the FHA. Because of the additional risk, the FHA and HUD mandate FHA-specific appraisals and recertification for FHA-approved condos.

What other types of properties does the FHA approve?

Some other examples of properties that can be purchased with an FHA loan include single-family homes, multifamily homes, and certain manufactured properties. You can purchase up to a four-unit property with an FHA loan.

Bear in mind that FHA loans can only be used to finance primary residences, not investment properties or second homes.

The bottom line: Is an FHA-approved condo right for you?

If you’re thinking of buying a condo, an FHA loan may be right for your purchase. These loans feature pros like more flexible terms and lower down payment requirements compared to conventional mortgages. You can use HUD’s approval list website to find the FHA-approved condos, where you may be able to find a property that’s right for you.

If you’re ready to move forward with your condo search, you can reach out to Rocket Mortgage to apply for a loan.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

² Client will receive a 1 point (1.000) loan level price adjustment (LLPA) credit on HomeReady and Home Possible purchase loans locked on or after January 2, 2024. One point (1.000) is equal to 1% of the loan amount. Minimum credit amount will be $2,000. Maximum loan amount is $350,000. Offer is not available with any other discounts or promotions. Offer cannot be retroactively applied to previously closed loans or loans already in process; offer is not transferable. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply. This is not a commitment to lend.