Why Condo Associations Need FHA Approval
It’s important that condominium boards understand Federal Housing Administration, or FHA, financing. The Federal Housing Administration is one of the largest underwriters for condominium mortgages, with FHA mortgages accounting for up to one-in-three new loans in some markets. To learn more about FHA loans and why condos need FHA approval, read on!
What Is an FHA Loan?
An FHA loan is financing from a lender that’s supported by the FHA. The Federal Housing Administration is part of the government’s U.S. Department of Housing and Urban Development (HUD). The FHA insures a mortgage from a lender, so a person can afford to buy a home or condo. FHA loans typically require lower down payments, lower closing costs, and easier credit qualifications than traditional home loans. This lower-cost financing helps to ensure a lower probability of default on a mortgage.
FHA loans have grown from less than 5 percent of condominium mortgages to more than 30 percent in some markets.
What is an FHA-Approved Condo Association?
An FHA-approved condo association is a condominium that meets all the qualifications for purchase by FHA loan-carrying buyers. Those who have an FHA loan can only purchase a property—home or condo—that’s been FHA approved. Because of their affordability, condos are popular with first-time homebuyers. And because FHA loans are geared towards first-time buyers, it makes sense that some condos may consider FHA approval. In fact, many condo buyers are looking for FHA-approved associations as a sign the association is stable and well-governed.
Learn More: Everything You Need to Know About Condominium Associations
Why FHA Approval Matters to a Condo Board
FHA approval means more than you might think. Even though an FHA approval might signify a good value, it also translates to other benefits for the homebuyer. For a community to be FHA approved, it must have:
· Less than 15 percent of units 60 days delinquent
· An adequate budget to maintain the common elements
· Fully funded reserves
· Appropriate insurance policies to protect association assets
Typically, an entire condominium association needs to be FHA approved prior to any FHA loan being issued for a purchase of a unit. Since FHA project approval takes up to 30 days, associations without FHA approval are likely to lose sales and may face angry unit owners.
How to Become an FHA Approved Condominium
For boards who are interested in being FHA condo approved, the process is fairly straightforward. Still, it’s important to consult a condo association attorney and your governing documents to make sure you’re maintaining legal compliance before moving forward with the FHA approval process.
To start, the FHA requires that a condo meet certain criteria by submitting an application and supporting documentation in order to obtain approval. Then, the FHA examines numerous factors prior to issuing a project approval.
For FHA condo approval, an association will have to meet many guidelines, including:
· FHA Reserve Requirements. Determination of adequate budget and reserve funding.
· FHA Delinquency Requirements. No more that 15% of units 60 days late in assessments.
· FHA Occupancy Requirements. The condominium complex has no more than 25% commercial space.
· FHA Insurance Requirements. Fidelity, flood, and other insurance policies must be in place.
Learn More: 8 FAQs About Condo Association Insurance
Being on the FHA approved condo list is so critical that some states like California and Virginia require the association to disclose the association’s FHA-approval status for all potential purchasers. FHA condos have an advantage. By accepting FHA loans, they’re marketable to the broadest range of buyers and show non-FHA buyers that their association meets the FHA guidelines.
Tips to Maintaining FHA-Approved Status
FHA condo approval has to be recertified every two years, so condo boards must be vigilant in maintaining their status. To stay on top of condo FHA guidelines:
· Work with your condo community manager to assemble relevant documents and notices
· Assign a committee to track approvals and manage recertification tasks
· Reach out to FHA representatives to learn more about maintaining your good standing
Can I Rent Out My FHA House?
It takes a lot of time and effort for condos to win FHA approval. Similarly, for someone with an FHA loan, it can be a time consuming and costly process. To recoup costs, some FHA condo loan borrowers may wonder: Can I rent out my FHA house? If it’s part of a managed association, like a condo community, it may not be possible. However, renting your house in an HOA does have benefits. Read “How Rental Properties Succeed in an HOA” to learn more.