The Federal Housing Administration insures both purchase mortgages and refinance loans. You can use an FHA-backed loan to finance a condominium, but only in you live in an FHA-approved condo. Condo property values tend to fluctuate more than other types of real estate, and, consequently, lenders and insurers, like the FHA, only finance or insure mortgages on condos that meet certain guidelines.
In the past, you could file paperwork on a case-by-case basis to have your condo or a condominium complex approved by the FHA. As of 2011, you can only apply for financing on a condo loan if the entire condo complex has already been approved by the FHA. The FHA does not grant its approval to condos that are split into multiple units, such as when several groups split a single condo into several housing units. So-called condo-hotels, houseboats and time shares are ineligible and the FHA does not approve any individual units that are not used as a primary residence.
To gain FHA approval, a condominium complex must contain two or more units and a complex must have an owner occupancy rate of at least 50 percent. Units still being built must have been already been sold to buyers and at least 50 percent of the condo buyers must intend to use the condos as their primary residences. A condo project can not have more than 25 percent of its floor space set aside for commercial purposes. Every condo project must re-apply for FHA approval every two years.
No one person or entity can own more than 10 percent of the units in the complex and the complex cannot gain FHA approval if more than 15 percent of the condo owners are in arrears with their condo association dues. The FHA also limits its overall exposure to each condo complex by only insuring loans on up to 30 percent of the units in any one condo complex. The condo association must have cash reserves equal to at least 10 percent of its annual budget to cover maintenance and repairs.
The FHA guidelines for condos seem very restrictive but by comparison, Freddie Mac and Fannie Mae only buy mortgages attached to condo units if the complex as a whole has an owner occupancy rate in excess of 70 percent. Additionally, people who take out FHA-backed loans only have to make down payments of just 3.5 percent. Many other lenders require down payments in excess of 20 percent on condominium projects. Therefore, FHA loans are one of the best alternatives to cash when it comes to buying condos.