FHA loans and the condo conundrum
If you're living in a condominium and have an FHA loan, you may be surprised to find that your condominium isn't currently on the FHA loan approval list. FHA approvals are not permanent, so a condominium association may have issues that cause the FHA to stop insuring loans for units within the development at any time.
If you're interested in refinancing with an FHA loan or would like to eventually sell your property to someone using FHA financing, you should take steps now to work with your condominium association to obtain a place on the list of FHA-approved condominiums.
FHA loan eligibility for condominiums
While some requirements are out of your control as a condo resident, you can work with your association's board and your condo management company to address some of the issues that may be preventing your building from FHA loan approval.
For FHA eligibility, your condo must meet the following requirements:
- No more than 50 percent of the units can be financed with FHA loans
- At least 50 percent of the units must be owner-occupied
- There must not be any pending litigation other than routine collection activity or foreclosures
- No more than 15 percent of the units can be delinquent in condo association dues by more than 60 days
- No more than 50 percent of the property can be used as commercial space
- Any investor may own up to 50 percent of the total units as long as at least 50 percent of the total units are owner-occupied
- At least 10 percent of the condo association budget must go toward reserve funding
- The association must have a master insurance policy that covers 100 percent of the replacement cost of the condominium not including the foundation or land; the association must also have general liability insurance, a fidelity bond that covers director and officers insurance and employees that handle finances, and flood insurance if the development is located in a flood plane
Individual FHA loan requirements
Once your condo has FHA loan approval, you can apply for FHA refinancing. You'll need to prove your ability to repay the loan with full documentation of your income and assets and have an appraisal on your condominium unit. In general, most FHA lenders require a minimum credit score of 620 or 640 or above, a maximum debt-to-income ratio of 43 percent or less and home equity of at least 3 percent.
Remember that FHA loans require mortgage insurance to be paid for the life of the loan in most circumstances, so be sure you calculate the costs of mortgage insurance into your FHA refinance plans.