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FHA Approval 101: What Condo Associations Need to Know

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The Federal Housing Administration (FHA) is an agency within the U.S. Department of Housing and Urban Development (HUD) that helps more Americans qualify to purchase a home or condo. FHA-backed mortgages have less stringent requirements than conventional loans, which is ideal for many people in the market for a condo.

However, potential buyers must find FHA-approved condos to finance their purchase with an FHA mortgage. What does this mean for your condo association? Read on to learn more!

What Is an FHA Loan?

An FHA-approved loan is a mortgage insured by the FHA, giving lenders an incentive to offer them. With the government’s backing, lenders are protected against losses if the owner defaults on the loan. This allows FHA-approved lenders to be more flexible with:

  • Lower down payments

  • Competitive interest rates

  • Lenient credit score requirements

  • Lower mortgage insurance rates

More than 80% of FHA loans are for first-time homebuyers, with about 60% of first-time buyers purchasing a condo in recent years. In some markets, as many as one-third of condo buyers used an FHA loan, showing a considerable increase from past decades.

What Is FHA Spot Approval?

Now called Single-Unit Approval (SUA), the FHA spot approval policy is designed to approve individual FHA-eligible condo units without requiring the entire condo association to be FHA-certified. If buyers are looking at a condo that isn’t already on the FHA condo list, they’ll need to go through the SUA process for that specific unit.

What’s an FHA-Approved Condominium?

An FHA-approved condominium is a condo community that meets the strict qualifications for FHA certification. These HUD-approved condos undergo a comprehensive review to confirm their eligibility for FHA-backed financing.

Buyers who qualify for an FHA loan can search for FHA-approved condos through the HUD website. Units in FHA loan-approved condos are already certified and don’t need additional single-unit approval.

RELATED: “Everything You Need to Know About Condominium Associations”

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Why FHA Approval Matters to Condo Associations

Because FHA approval requirements are so strict, meeting these qualifications can say a lot about your condo association to potential buyers. FHA approval shows that:

  • The association board maintains the budget

  • Association members pay dues on time

  • The association has adequately funded reserves

  • The association has proper insurance coverage

  • A large percentage of units are owner-occupied

  • The community is being operated appropriately

Many first-time buyers are interested in condos because they’re affordable, easier to maintain, and offer shared resident amenities. With so many first-time buyers turning to FHA loans, it can be incredibly beneficial for condo associations to go through the FHA approval process.

Condo Requirements for FHA Approval

For a condo project to be eligible for FHA approval, it must meet several requirements, including:

  • Commercial usage limits. The commercial or non-residential space within the condo project must be within 25% and 55% of the total floor area. HUD will consider mixed-use development market trends when determining the maximum limit.

  • FHA-insured mortgage limits. The acceptable range for FHA loans for the condo unit must fall between 25% and 75% of the total units. HUD establishes the specific maximum percentage.

  • Owner-occupancy requirements. Between 30% and 75% of units in the condo project must be occupied by the owner. When setting the upper and lower limits of owner-occupied units, HUD considers several market factors, including geographic region and loan default rates.

  • Reserve fund requirements. The condo association’s reserve account must be funded with at least 10% of the monthly assessments. However, HUD can set a lower amount based on reserve study results.

Additionally, the condo association must submit documents to confirm the following for FHA approval:

  • The condo consists of one-family units only

  • The condo is fully compliant with local, state, and federal laws

  • The condo is complete and ready to occupy

  • The condo has at least the minimum insurance coverage

DOWNLOAD: “A Guide to Getting Your Condo Association FHA Approval”

Need Help Getting FHA Certified?

With so many perks for condo associations, FHA certification is worth taking the time and effort to maintain. If your association board is feeling overwhelmed by the FHA-approved condo process, an experienced community management company can help you meet eligibility requirements, gather the necessary documents, and complete your FHA application.

Check out our ebook, “Top 10 Considerations for Choosing a Community Management Company,” for tips on finding the right manager for your association!

FHA Approval Frequently Asked Questions

Are condo associations required to get FHA approval?

No, condo associations generally don’t need to be FHA-approved. However, FHA loan-approved condos can attract more buyers, avoid delays during sales, and maintain high standards for residents.

How long is the certification process?

FHA approval for condominiums may take up to 30 days, which can significantly impact potential sales. Maintaining FHA approval will streamline the loan and closing processes.

How long is FHA approval valid?

FHA condo approval is valid for three years. To maintain eligibility, the condo association must resubmit an application for recertification.

How can I check if a condo is FHA approved?

If you’re wondering how to find FHA-approved condos, the HUD search page lets users explore condo projects in specific areas or by condo name. Once you know where to buy FHA-approved condos in your area, you can narrow down your options.