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What Does It Mean If A Condo is Not FHA approved?

Mike Chissell • Apr 12, 2023
a blue house with a staircase leading up to the second floor

What does it mean if a condo is not FHA approved?


If you are considering buying a condo, you may have heard the term "FHA approved" before. The Federal Housing Administration (FHA) insures mortgages for condos with as little as a 3.5% down payment, but only for those that meet their strict standards. So what does it mean if a condo is not FHA approved? In this blog, we will explore what it means for a condo.



Eligibility Requirements for FHA-Approved Condos


In order for a given condo to be approved for an FHA home loan, it must be on (or added to) the FHA's list of approved condominium projects. FHA publishes a searchable list of approved condo projects on its website. This link has not expired since the publication of HUD 4000.1. Borrowers and lenders can use the HUD search tool here to find condo projects that are on the FHA approved list.


What criteria must a condominium project meet to be included on that approved condo project list? FHA guidelines state, "to be eligible for FHA mortgage insurance, the project must have been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located and with all other applicable laws and regulations."


FHA Condo Loan Terms and Eligible Condo Projects


“FHA insures condominium single unit loans for up to 30-year terms to purchase or refinance a unit in an FHA-approved condominium project. The condominium project must be primarily residential, contain at least two dwelling units and can be detached, semi-detached, a row house, a walk-up, mid-rise, high-rise, including those with or without an elevator, or manufactured housing.” That is a quote from the FHA/HUD official site.


Any part of the condo which is used commercially must conform to typical FHA rules which require business use of the property to be subordinate to the residential nature of the space. Business or other non-residential use of the property to be secured by FHA loans in general are subject to the following rule in HUD 4000.1:


“The non-residential portion of the total floor area may not exceed 49 percent.” That information is found on page 487 of HUD 4000.1.


Types of Condo Projects Ineligible for FHA Approval


Some properties are not eligible due to the nature of the project. For example, "condo hotels" are not allowed on FHA approved condo project list. Also forbidden--timeshares, houseboat projects or condos that feature more than one dwelling in a single condominium unit.


Restrictions and Covenants That Can Affect FHA Approval


Condo projects may not be FHA approved if they contain restrictive requirements, agreements, or covenants that prevent the owner from freely disposing of the condo unit at any time. The “right of first refusal” clause in some condo owner association agreements can be problematic for FHA borrowers.


In summary, if a condo is not FHA approved, it means that the property is not eligible for an FHA-insured loan. This can limit the options for potential buyers, as FHA loans are often sought after due to their lower down payment requirements and more flexible credit score requirements. However, it's important to note that just because a condo is not currently on the FHA-approved list, it doesn't mean that it can never be added in the future. It's always a good idea to work with a knowledgeable lender who can help guide you through the loan process and provide insight into the various loan options available to you.


If you're looking to purchase a condo with an FHA loan, it's important to work with a lender who is well-versed in FHA loan requirements and the process for getting a condo approved. Chissell Mortgage Group has years of experience helping clients secure FHA loans for their dream homes. Call us today at 727-376-6900 to learn more about your options and get started on the path to homeownership.


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