Rules With FHA Financing & Condos
- FHA insurance protects lenders by reimbursing them if the homeowner defaults. FHA insures loans on individual condominium units for purchase and refinance transactions. A condominium is a multi-unit project with individually-owned units that are either attached or detached. Acceptable condo projects are primarily for residential use, and the ownership is fee simple, giving the homeowner the greatest possible interest one can have in real estate. Owners collectively own the property, common areas and buildings in the project.
- Qualifying for a loan on a condo requires the advanced approval of the project by the Department of Housing and Urban Development (HUD), which oversees FHA. FHA-approved condominiums meet HUD standards for homeowner's association (HOA) management and finances. HUD reviews the bylaws and other governing documentation to ensure the HOA and building are financially viable and safe for occupants. HUD maintains a database of approved condo projects on its website. The entire complex must be approved for a borrower to obtain an FHA refinance or purchase mortgage on a single unit.
- The borrower and condominium unit must meet certain standards to obtain financing. These basic underwriting rules apply to all property types. The mortgage amount is limited to a statutory loan cap established annually by FHA. Through September 31, 2011, the loan limit for a single-family unit in low-cost geographic areas is $271,050 and $625,500 for high-cost areas, according to Mortgagee Letter 2011-29.
Borrowers need at least a 500 FICO score to qualify for an FHA loan. A 580 allows them to purchase with the minimum down payment requirement of 3.5 percent. The borrower's total housing debt should not exceed 31 percent of her gross income. The total of her housing debt and other fixed monthly obligations should not exceed 43 percent of her gross income. - Site condominiums, which have detached, single-family dwellings and a declaration of condominium covenants or condominium form of ownership, do not require FHA project approval. Manufactured housing condominium projects, which differ from site condominiums and traditional condominium complexes, do require project approval. The manufactured home lot consists of an undivided interest in its common areas or a share in the cooperative association that owns and operates the lot.
