Finding a FHA approved condo association in Vermont.

For many condo and townhome buyers in Vermont FHA loans are their best option. But that can make the search a bit more tricky because not all condo and townhome associations are on the FHA approved list. In this article by JP Gambatese we will breakdown what FHA loans are and how to find FHA approved associations in Vermont.

What is the FHA, and what are FHA loans?

The Federal Housing Administration (FHA) is a United States government agency under the U.S. Department of Housing and Urban Development (HUD), a governmental department responsible for administering federal housing and development laws. The goal of the FHA is to promote homeownership and increase its accessibility to a wider range of people by encouraging lenders to lend to potentially higher-risk buyers. 

An FHA loan is a mortgage that is insured by the FHA and must be doled out by an FHA-approved moneylender. 

What is an FHA-approved condominium association?

Simply put, an FHA-approved condominium association is a condominium that meets the FHA loan standards and thus can be financed with an FHA loan. There is a long, convoluted document detailing the entire FHA policy on condominium approval, but commonly cited regulations include:

1. Building health: Not only must the building be completely finished – condominium associations that are currently under construction are disallowed from gaining FHA approval – but the conditions of the building and its amenities must meet guideline standards. 

2. Occupancy ratios: The FHA deems that no more than 35% of the property may be used as commercial space. On top of that, no more than 50% of the property may be owned by investors or be rented out by the owner.

3. Financial stability: As dictated by occupancy ratios, the property, according to the FHA, should not be reliant on investors for financial health. The homeowner association (HOA) must have sufficient funds to cover capital repairs and necessary replacements for at least the next two years. In fact, 10% of the HOA’s income must go toward a cash reserve account. Moreover, the association cannot be in the midst of a lawsuit.

4. Individual unit restrictions: individual units are subject to guideline scrutiny as well. Conditions must meet FHA criteria for safety and habitability and its size must be able to function as single-family residences. 

5. Insurance: the association must have adequate insurance. This includes homeowners insurance for damage or loss to the building, liability insurance to cover claims resulting from injuries, and fidelity insurance that covers the association’s funds. 

Past the initial approval for the association, FHA approval must be renewed every three years or the association will lose its standing. 

Why is it important for most buyers (and sellers)?

While FHA loans are appealing to first-time home buyers in particular, it is a common misconception that these loans are only given out to first-timers. Any borrower who meets the criteria for an FHA loan is eligible to use it to buy a condominium. For most buyers, these loans are particularly important for several reasons.

1. FHA loans are more lenient than the average loan, and down payment requirements are significantly lower as well. As it currently stands, if a borrower has a credit score of at least 580, they are eligible for the FHA’s “low down payment advantage,” which is 3.5%. Borrowers with a credit score below the 580 threshold must put down a minimum of 10%. Conventional loans have both stricter credit score requirements and higher down payment requirements. FHA loans are also more lenient with financial histories, meaning that buyers who have previous records of bankruptcy or financial turmoil are still able to gain a loan.
2.  In addition, interest rates for FHA loans are competitive to or lower than conventional loans. Whereas average 30-year fixed mortgage loans are currently averaging out to about 6.9%, FHA-approved 30-year fixed loans are currently at 6.7%. This can save buyers a significant amount of money over the life of the loan.
3. Because gaining FHA approval is difficult by proxy of the number of guidelines necessary, FHA-approved condominiums allow buyers to have the ease of mind that the property they are buying is safe, habitable, and well-maintained. On top of that, the FHA also requires condominium associations to be in a certain financial standing, so buyers can have peace of mind in knowing that the condominium is managed well. 
4. For sellers, FHA-approved condominiums are particularly attractive properties because of the wide pool of potential buyers – which is large for the reasons above – once it hits the market. Given the reasons FHA loans are attractive to buyers, selling an FHA-approved condominium is a lock.

How can it impact your ability to rent your condo?

The FHA has several limitations for home buyers who intend to rent the property out. For one, guidelines determine that no more than 50% of the condominium complex may be held by a single investor or used to rent out. On top of that, the intended audience for FHA loans is owner-occupied properties. Should a buyer be granted an FHA loan for a property, they are generally expected to live in that property for the first year after purchase. After the first year, renting should not garner any issues whatsoever (if the condominium association allows for it), but it is important for potential landlords to understand that renting out their condominium in the first year of purchase could result in FHA loan term violations. As alluded to above, it is also possible that the condominium association disallows renting altogether, though that holds true for any association regardless of whether or not they have FHA approval. Significantly, though, it must be noted that FHA has a priority on ensuring that properties are owner-occupied, so it is feasible that FHA-approved associations are more cautious about allowing renters to occupy the property so as to not be concerned with reaching the 50% threshold. 

How to find a FHA approved condo association in Vermont? (2 ways)

1. To check if a condominium association is FHA-approved, buyers can  use the HUD website’s FHA Condo Lookup Tool.
2. You can contact us here at The Vermont Condo Pros and we are able to check our own database of approved associations. 

Is it possible to get a non approved association on the approved list? 

Yes! The best way to do this is to talk to a highly experienced loan officer like Nick Parent at The Vermont Mortgage Company. They may be able to work with the association to help them get on the list or get spot approval.