There are a number of disappointments that can happen during the home-buying process. Few of them compare to falling in love with a condo only to find out that the complex isn’t approved by HUD, so your FHA loan won’t fly.

On several levels, this scenario is just wrong. First, if you’re working with an agent, he or she should only be showing you approved condo complexes. If you aren’t working with an agent, then you have only yourself to blame.

Either way, it’s a sad situation, and for the novice homebuyer, it’s one that most likely has you confused. Let’s take a look at why your FHA loan will cover only some condos.

Basic FHA Requirements for Condos

The lender for an FHA-guaranteed mortgage must not only determine the creditworthiness and risk of the borrower, but it must also consider the risk of lending on a home governed by a particular homeowners association.

FHA has certain qualifications in place that rule out those condo associations that, for any number of reasons, make investing in them risky.

Some of these include:

• How many of the units are rentals? FHA stipulates there can be no more than half that are tenant-occupied.

• How many homeowners are delinquent on their association fees? This number must be fewer than 15 percent.

• FHA limits individual ownership to 10 percent of the total units in the complex. So, if Donald Trump or some random Saudi prince decided to buy up 12 percent of the units, the complex won’t be certified.

• There must be no outstanding litigation against the association. If the association decides to sue the builder for that crummy roof, you guessed it: no certification until the litigation is settled.

• Cash reserves must equal or exceed one year’s worth of the association fees. What if it turns out the builder isn’t liable for the roof leaks? The reserves must be sufficient to cover repairs or replacement.

These items represent only a handful of FHA’s requirements.

But, because these requirements are so stringent, only about 10 percent of the nation’s condo complexes are FHA-approved, and approximately 60 percent of those seeking approval are turned down, according to John McDermott, writing in National Mortgage News.

Advantages of the FHA Condo Approval Process

One of the biggest advantages to the FHA-backed loan, when buying a condo, is that the government does a lot of your due diligence for you. No, the Fed isn’t doing it out of the goodness of its heart, but buyers nonetheless benefit from the process.

All homebuyers have a legal duty to perform a thorough inspection of the home and an examination of any paperwork linked to it before completing the purchase.

One of the biggest headaches in the condo purchase process is the sheer amount of paperwork you need to read, a package known as the HOA documents, or “docs,” for short. While you’ll still need to read the CC&Rs (covenants, conditions and restrictions) to understand what you can and cannot do as a homeowner in the community, FHA scrutinizes some of the heavier reading, such as the budget.

Of course, you should still drop the pile of papers in your attorney’s lap for the final OK on the purchase, but it’s good to know that FHA won’t approve a complex if some of the shadier or more distasteful practices are occurring.

Another advantage to purchasing an FHA-approved condo is that the hoops the association must jump through aren’t a one-shot deal. They must be recertified every two years to remain FHA-approved.

Finally, an FHA-approved condo is easier to sell. FHA-backed loans are ideal for lower-income buyers – the type who typically purchase condos. If your complex is already approved, your buyer pool is instantly expanded.

Find Your Dream Condo Without the Disappointment

If you will be using an FHA-backed loan and you’ve decided to purchase a condo, don’t set yourself up for disappointment by viewing condos that aren’t approved.

To make sure the condo you are about to tour is approved, search for FHA-approved condos  on HUD’s website.