FHA Condo Approval Requirements

Meeting FHA Guidelines for Condo Project Approval

The following is a brief overview of the general conditions that the Federal Housing Administration (FHA) requires for FHA approved condos. Some criteria may vary slightly based on the type of condo project.

For more detailed information on eligible and ineligible condo projects, please visit our Eligible vs Ineligible To learn more about the different types of FHA-approved condos, please visit our FHA Condo Types

It’s important to note that the FHA has specific guidelines for different types of projects and submissions. If you’re unsure about what’s needed for your project, don’t worry – we’re here to help. We can guide you through the process and provide you with the exact criteria depending on your condo project’s needs.

Insurance Requirements

Property, liability, flood (if in flood plain), and crime insurance coverage is required.
Property insurance must have 100% replacement cost coverage.
Fidelity Bond/Crime Insurance is now required for projects with 20 or more units
The coverage level must be equal to the sum of three months of HOA dues income plus the aggregate amount in all reserve funds.
If the HOA uses a management company, the management company must have a sufficient crime policy.

Owner-Occupancy

At least 50% of the units in a project must be owner-occupied (as opposed to rented).

Right of First Refusal

Condo legal documents that have first rights of refusal are allowed, unless they violate discriminatory conduct prohibitions of the Fair Housing Act.

Non-Residential and Commercial Space

No more than 25% of the total floor area can be used for non-residential or commercial purposes.
Any non-residential or commercial portions must be compatible with residential use.
Exception requests may be considered on a case-by-case basis by the HUD regional homeownership center.
No non-residential exception is allowed above 35% of total floor space, including live/work projects.

Investor Ownership

No more than 10% of the units may be owned or controlled by one investor (through one or multiple entities).
The unit an owner-occupier lives in is not counted as an investor-owned unit.
The 10% limit includes all rented and leased units that a developer/builder owns, including those acquired during a project acquisition.
Unoccupied and unsold units owned by a builder/developer are not considered as investor-owned and are not part of the 10% limit.
Eligible non-profit and government housing programs are not subject to the 10% ownership interest limitation.
Units in rent-regulated projects are not subject to the investor cap.
Investor ownership cannot exceed 49% of the total units at the time of approval.

Delinquent HOA Dues

No more than 15% of the total units can be in arrears (30 days past due) of their condo association fee payments (does not include late fees, pool fees, or other administrative expenses).
The 15% includes all units, including vacant and bank-owned units.
Exceptions may be considered on a case-by-case basis, only under a HRAP submission, up to a 20% cap.

Financial Documents

HOA budgets, financial statements, bank statements, and potentially reserve studies may be required.
Financials must show solvency, specific line items showing at least 10% of monthly dues going into reserves, and adequate funding to cover insurance payments and deductibles.

Reserves

One of the most closely scrutinized items is the level of reserve funding, particularly in older projects
The FHA would prefer to see a professionally prepared reserve study that shows the appropriate amount of reserve funding and that the HOA has that amount in reserves
If a reserve study is not available, it is important to present some type of analysis that shows the level of reserves are reasonable and that reserves are going in the right direction
The FHA may reject some applications with inadequate reserves and require other HOAs to get a reserve study before reconsidering the application

Special Assessments

FHA considers special assessments to be a potential flag indicating bigger problems.
A signed and dated thorough explanation of the special assessment is required and unsatisfactory explanations can result in an application rejection.

Litigation

Any current or pending litigation must be disclosed and the total potential exposure to the HOA must be fully explained.
Routine items such as a mortgagee foreclosure do not have to be reported.

Loan Concentration

The FHA limits its risk in any one project by capping the number of loans it will insure to 50% of all units in the project.
This concentration level can be viewed on the HUD approved condo website at: https://entp.hud.gov/idapp/html/condlook.cfm.
Exceptions can be approved for up to a 100% concentration level for existing projects and any FHA-to-FHA streamlined refinance transaction is always allowed.

Pre-Sale Requirements

For proposed, under development, gut rehab conversion or new projects, a certain number of units must be sold before the FHA will insure the first unit.
At least 30% of the total units in the legal phase must be sold (under contract or sold).
This number goes up to 50% one year after the first unit is sold for proposed, under construction or existing projects less than a year old
There are no presale requirements for projects over 1 year old or non-gut rehab projects

10 Year Warranty

For proposed, under construction or gut-rehab conversions that are less than 1 year old, the Developer/Builder must offer a HUD approved 10 year construction warranty plan and have a final inspection performed by an HFA Roster Inspector
This is not required if the project is in a local jurisdiction that performs a minimum of three inspections (typically footing, framing and final) and issues a final certificate of occupancy

Legal Phasing

Legal phases are distinct phases of development as evidenced by the public writings of the condo plats and legal documents
A 200-unit master development might be legally phased into four 50-unit phases, with each phase proceeding after selling out a certain number of units in the prior phase
Vertical legal phasing is allowed in high rises, with some conditions, in groupings of no less than five consecutive floors

Transfer of Control

The transfer of control from the Declarant/Developer to the owners must happen no later than
120 days after the date 75% of the units have been conveyed
3 years after the sale of the first unit
The time frame established by state or local condominium laws

Project Certification:

Depending on the condo type and submission package, certain “certifications” need to be signed by an authorized representative, under penalty of law, attesting to the condo conditions and submission accuracy
Unlike several years ago, no attorney certification or letter is required

FHA Condo Approval Requirements

Meeting FHA Guidelines for Condo Project Approval

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