Complications Buying Condos Using FHA Financing

FHA doesn’t play well with condos. Which is too bad, really, since FHA is such a perfect option for first time buyers since it requires only 3% down, as opposed to the 10% most banks are demanding right now. For a borrower to use an FHA loan to purchase a condo, it must be on the FHA approved list (click here for database). If you take a look through this database, which is not very user-friendly by the way, since it doesn’t allow you to search by address, you’ll see it’s slim pickings.

That doesn’t mean that you should give up hope though. You can still try for a ‘spot-approval’ which means that FHA will see if the building meets certain criteria and then give a one-time exception. Some of the most restrictive criteria include:

· Building must be at least 90% sold (so no new construction qualifies)

· Building must be >51% owner-occupied (I’ve found this is an issue for many older buildings where units are low in price.

· No single entity owns more than 10% of the units

· Condo Association must not be currently in litigation

· No special assessments are pending

· There is an adequate reserve fund and plan

To protect yourself as a buyer, it’s advisable to include a financing contingency period while the lender investigates whether you can get a spot approval. You don’t want to be locked into a contract only to find FHA won’t give you the loan.

So, what to do if you’re interested in a condo but can’t get FHA approval? First, speak with your lender (or other lenders) about other programs that might be available. If your budget allows it, consider looking at townhouses or duplexes, which aren’t subject to the same FHA approval requirements. It may be even more affordable than you think, when you factor in the lack of a condo fee. Or concentrate your search on buildings you know to be FHA compliant.