Whether you’re selling a condo or are considering buying one, it’s important to know if a certain complex is FHA-approved.
Condos that are approved by the Federal Housing Administration are those that meet U.S Department of Housing and Urban Development (HUD) property eligibility requirements. In order to get approved, condominium associations have to go through a specific application process. If approved, the condo complex will be included on a master list that’s managed by the FHA.
So, why is this all important? Both buyers and sellers would greatly benefit from condos that are FHA-approved, and here’s why.
Benefits For Buyers
If you plan to take out an FHA home loan, you’ll need to make sure the condo you plan to buy is FHA-approved. FHA mortgages are very attractive for buyers because they are among the easiest types of home loans to qualify for. These types of government-backed mortgages require a smaller down payment compared to a conventional mortgage, requiring as little as 3.5%. In addition, buyers can get approved even if they have less-than-stellar credit.
Condos that are FHA-approved also adhere to certain quality control requirements that not all HOA associations are able to meet. In fact, it’s tough for condos to get approved by the FHA because of the strict requirements. As many as 60% of associations are denied FHA approval, which means those that do are very stringent in how they manage their condos. The FHA only loans money to buyers for condos that are considered to be a safe investment.
Buying real estate always comes with some inherent risk, and ensuring that you’re buying a sound property is extremely important. Purchasing a condo that the government deems to be a good buy can offer you some peace of mind knowing that you’re investing your money wisely. You’ll also have the guarantee that your condo HOA is financially fit and therefore has enough reserves to cover any potential issues in the future.
Benefits For Sellers
If you’re a seller of a condo, you also have certain advantages if your complex is FHA-approved; namely, a much wider pool of buyers. If buyers are planning to take out an FHA home loan, they won’t even look at your unit because the only condos they’ll be eligible to purchase are those that are approved by the FHA.
Without FHA approval, your condo will be unattainable to many buyers who may otherwise be ready and willing to offer you the price you want and deserve for your property. Obviously, the more buyers your listing can attract, the better the odds of selling more quickly, and potentially for more money.
Even if a buyer has a handsome income to be able to comfortably afford your condo with a conventional mortgage, your condo may not sell for as much as it could if it does not meet FHA requirements.
What Are the Requirements For Condos to Be FHA-Approved?
In order for a condo to achieve FHA approval, it needs to meet certain requirements, including the following:
- A maximum of 50% of the property can be used as commercial space;
- A maximum of 15% of the units can be more than 60 days in arrears;
- At least 50% of all the units must be owner-occupied (the exception to this rule applies to condos with at least 3 years of stable finances and low delinquency rates, which can have as little as 35% rental units);
- A minimum of 10% of all budgeted income must be dedicated to a reserve account;
- Reserve funds must be enough to cover all insurance deductibles and capital repairs and replacements for the next 2 years;
- General liability insurance must cover all common elements and public ways;
- Complexes with 20 or more units must have a fidelity bond to cover the Board of Directors and staff that handles association funds.
This list is by no means exhaustive. There are plenty of requirements that condos need to meet in order to be approved by the FHA, which is why so many complexes have not been able to achieve such status. That’s why FHA-approved condos are often seen as more valuable than those that don’t come with such backing.
The Bottom Line
Condo complexes that are approved by the FHA offer advantages to both buyers and sellers. Buyers who are looking to make a purchase using an FHA home loan need to ensure the place they’re looking at is FHA-approved, while sellers can expand their pool of prospective buyers. These types of dwellings are typically the most cost-effective option for buyers, and available FHA financing helps to advocate affordable homeownership.