Finding And Investing In FHA Condos

Interested in investing in a condominium approved by the Federal Housing Administration (FHA)? Before you proceed, you will need to understand the nuances of these properties and what exactly “FHA-approved” means.

What the FHA Does

FHA is a government agency that provides insurance on mortgages issued by lenders it approves. It insures mortgages on single and multi-family homes and condos. The insurance protects the lender against losses if a borrower defaults on their loan. FHA is the largest insurer of mortgages and was founded in 1934 to stimulate the housing market following the Great Depression. (For more, see: What is an FHA Streamline Loan? )

FHA-insured loans are aimed at borrowers with low to moderate incomes who may not be able to make a large down payment. They allow for down payments as little as 3.5% of the purchase price, which is much lower than the typical 20% required by lenders of traditional loans. This makes FHA mortgages popular with first-time homebuyers. Compared to conventional loans they also have less stringent income and credit requirements.

Properties financed by FHA-insured loans must be a primary residence and owner-occupied. FHA loans are not intended for investors. Investors who want to buy a unit or units in an FHA-approved condo development will need to finance the purchase with a conventional loan or pay cash. (For more, see: The FHAs Minimum Property Standards .)

Requirements for Condos

The agency has strict criteria a condo development must meet in order to be FHA-approved. The entire condo association, for example, must be certified by the FHA before it will back any loans on a unit in the development to make sure it is well managed and financially stable. (For more, see: An Introduction to Buying a Condominium .)

In September 2012, the U.S. Department of Housing and Urban Development (HUD), which oversees FHA, made requirements for condo complexes to be FHA approved a bit easier. This included increasing the commercial-to-residential ratio in mixed-use condo developments to allow for more commercial space. HUD also eased requirements so that no more than 15% of units can have delinquent condo fees for more than 60 days, up from 30 days. (For more, see: Essential Tips for Buying a HUD Home .)

One of the changes is good news for investors in particular. Previously, no single investor could own more than 10% of units in a complex. That limit was increased to 50% if at least half of units have been sold or are under contract, which opened up more opportunity.

If an investor owns multiple units and lives in one as a primary residence that unit is not considered investor-owned and isnt factored into the ratio. Also, units owned by a developer that have not been sold and are not rented or previously occupied are not considered investor-owned either. (For more, see: Top Reasons to Apply for an FHA Loan .)

How to Find FHA-Approved Condos

HUD has a comprehensive list on its Web site where you can search for FHA-approved condo developments throughout the U.S. You can narrow your search by entering as much or little criteria as you would like including state, city, county, zip code and condo name. (For more, see: A Condo-buying Walkthrough .)

You can also work with a realtor with expertise in the geographical area in which you are searching to find FHA-approved condos. (For more, see: Is an FHA Mortgage Still a Bargain? )

Association Approval

Finding an FHA condo to invest in is only half the battle. You will also have to get past the condo association’s board. Many look down on investor-only purchases that are intended to be flipped for a profit or rented long or short term for income instead of occupied by the owner. Associations also don’t want to lose FHA approval if too many units are rentals and owner occupied units dip below 50%.

After identifying a development in which you would like to invest you will need to do your research to see if investor owned condos are allowed. (For more, see: Understanding FHA Home Loans .)

The Bottom Line

Finding and investing in FHA condos may seem daunting. But proponents of condo developments that are FHA-approved maintain that they increase the pool of potential buyers, which is good news for owners when it comes time to sell. As always, do your homework, have your paperwork in order, and be sure to choose a good property. (For related reading, see: Buying Foreclosures at a Bargain Price .)