Condo approval is a necessary component of the FHA approval process. This means if you purchase a condo, you have an extra layer of approval you must go through in order to close your loan. The lender must not only ensure that your credentials meet with the approval of the FHA, but that the condo association does as well. In order to obtain this approval, the condo association must go up for review with the HUD Review and Approval Process. This process might sound daunting, but it is rather ordinary – every association must go through it. In general, the process takes 30 calendar days to complete, but it can take a little longer depending on the number of applications received at one time.
What are the FHA Condo Requirements?
The condo requirements are the same across the board, no matter where you purchase a condo unit. The requirements include:
- 50 percent of the units must be owner-occupied As of this year, however, these requirements were eased up slightly. Today, owner occupied means that the unit does not fall under any of the following categories:
- A tenant does not live in the property
- The property is not empty and listed in the MLS
- The property is not empty and available for rent
- Being purchased by a borrower that does not intend to live in the property as their first property
- Adequate liability and hazard insurance must be in place that covers 100 percent of the replacement cost of the building(s).
- If the building is in a flood zone, adequate flood insurance must be obtained.
- If there are investor owned properties in the building, one owner cannot own more than 10 percent of the units.
- All common units must be completed and available for use by homeowners.
- At least 50 percent of the units must be occupied without FHA funding prior to the first FHA approval for the building
- The property is not used as a timeshare or vacation home.
- At least 85% of the homeowners must be on time with their association dues. If there are homeowners with late dues, they cannot be later than 60 days and cannot total more than 15% of the homeowners.
- There must be adequate reserves in place in the association’s budget in order to cover immediate and future necessary repairs.
If the condo building is not yet finished and is still under construction, the following requirements must be met:
- An environment review application must be completed
- All information for units, common areas, and the building as a whole must be provided
- A map of the area is necessary
- A site plan must be completed
- Approval by the Historic Preservation Office must be obtained
- EOE form must be executed
The FHA may request further documents for unfinished buildings, such as a proposed budget, any minutes from homeowner’s association meetings that took place, and any management plans that are in place.
If the building already exists when approval for the condos are requested, the requirements are similar with a few additions including:
- Recorded plat
- Any legal documents that were executed
- Current financial statements
- Current minutes from any meetings
- Proof of completion of the project
Why are there Requirements for Condos?
Generally, condos are a higher risk for the lender and the FHA, which is why they require further approval. For example, if more than 15% of the homeowners were delinquent on their homeowner’s association dues, then the association would run into financial trouble. This could mean that the work that needs to be done on the property does not get done. This trickles down to affect every property, which eventually affects the value of the units, which can harm the borrower. If the borrower runs into trouble and cannot pay the mortgage and yet cannot sell the property because the value is not high enough, the FHA ends up with the property on their hands as a HUD home because you foreclosed on it.
The requirements might seem strict, but they can go through the HUD approval process fairly quickly. Typically, they do not take more than 30 days to complete and in some cases, can be done in as little as 2 weeks. The length of time depends on the amount of information the lender provides to the HRAP and how fast the lender responds to any inquiries the board has for them. The association also needs to be willing to provide all documents that support the units, including any legal and financial documents, as well as the minutes from any meetings. Some developments do not want to be bothered with the FHA rules and do not get FHA approved, but it is in their best interest to do so since a majority of borrowers today turn to FHA financing.
The FHA recently reduced their requirements for condo approvals in an effort to help borrowers that are either first-time homebuyers or those that fall into the low to middle-of-the-road income earners. Because these borrowers make up a majority of the housing industry today, the FHA wanted to increase the likelihood of them being able to purchase a condo, since that is typically the first type of home people want to purchase whether it is their first home or they are just overcoming a financial crisis and want to be homeowners again. Condos have a lower level of responsibility in terms of work that needs to be done and the effort that homeowners need to put in. Borrowers that work a lot or do not have a large amount of money to put down often turn to condos first. Finding a condo that is already FHA approved will make the process go the fastest, but getting it approved for FHA loans is not an impossible task, you just have to have some patience as you wait for the process to get completed.