How to Get an FHA Loan for a Condo
Too many people think that the Federal Housing Administration only issues loans for single family detached homes. The reality is very different. You can get FHA loans for attached family homes and even condominiums. Here are the basic facts you need to know in order to get an FHA loan. Note that there are additional requirements, but these are the most important ones.
The Federal Housing Administration will issue a condos mortgage if it is part of an approved project. The challenge for borrowers who want to get a mortgage for a condo through the FHA is finding the few condos approved by the FHA, since the FHA has to approve the entire project for individual buyers to be allowed to buy any unit via an FHA mortgage. And only a few projects in any housing market are on the FHA approved project list.
If the property isn’t on the FHA list, you’re going to have to get a conventional mortgage or a VA loan. Properties can fall off the list if they violate various terms, like no more than 10% of condo units being owned by one investor or more than a sixth of residents are late on HOA dues.
Approved projects can be found on the Housing and Urban Development (HUD) website, and you can work with a realtor who knows how to search for approved projects instead of just the MLS.
The FHA only approves condos that are primarily residential. The condo development must contain at least two dwelling units. The FHA offers condo loans for semi-detached, detached, row-houses, walk-ups, mid-rise condos and high-rise condos. It doesn’t require condos to have an elevator. The FHA does consider mixed use properties for condo purchases, but any non-residential use of the property must be less than half of the total floor space. This is why a common style of mixed-used condos puts a business on the first floor and has two levels of living space (or more) above the business. In short, a condos loan cannot be used to buy retail space unless it is only a small portion of the property.
For most of the United States, the maximum amount you can borrow on an FHA mortgage is around $424,000. The maximum limit is set to 150% of a conforming limit, so you can borrow more than this in expensive areas like New York City and Los Angeles. However, you cannot use an FHA loan to buy a luxury condo in more affordable markets. A minimum loan limit is set at 65% of the conforming limit, so it is almost impossible to get an FHA condo loan for cheap, small manufactured condos. If you cannot secure the property without the loan balance being above or below these limits, you’ll have to arrange other financing.
There are also requirements that borrowers themselves must meet to quality for an FHA condo loan. If the loan to value ratio is greater than 80%, the borrower must have mortgage insurance. You can avoid mortgage insurance if you put at least 20% down. However, the minimum down payment is 3.5%. Charities and family members can legally gift you that down payment.
The FHA has more flexible lending terms than other mortgage providers. A general rule of thumb is that you’ll need a credit score of at least 580 to qualify. Steady employment is important, and having worked at the same employer for at least two years is a strong plus. Your monthly income is what will determine how much you would be allowed to borrow.
The other factor to consider is any debt you already have. The FHA sets a maximum debt to income ratio of 31/43. This means no more than 31% of your gross monthly income can go to pay the FHA mortgage. This is the front-end ratio. No more than 43% of your gross monthly income can go to pay all of your debt payments, including the mortgage. That is called the back-end ratio. This means that with the FHA mortgage taking up 31% of your gross income, no more than another 12% of your income can go to pay your car note, student loans or credit card debt. You may want to save up and pay off a few smaller debts to free up cash flow if you’re close to this threshold.
While getting an FHA loan for a condo is tricky, it is still definitely feasible. Remember that it has to be for an approved project. The FHA has more flexible credit terms than other lenders but still have debt to income ratios you must meet, and it only lends money to those who are likely to be able to repay them.