Takeaways:
- Condos are more popular than ever due to factors such as community living and maintenance, plus the promise of homeownership and equity.
- One of the first steps is finding either a VA-approved condo or one that is eligible for approval.
- The condo, like any VA home loan property, must be safe, sound and sanitary, and the homeowners association must be financially stable.
Due to community living and maintenance, plus the promise of homeownership and equity, condos are more popular than ever. This is especially so because federal home loans can be used to obtain them.
Below you will find a guide that will help you through the process of getting a condo for your client using a federal home loan.
Differing condo rules
When obtaining a condo for a Department of Veterans Affairs (VA) home loan client, it is important first to thank them for their service. The second step is finding either a VA-approved condo or one that is eligible for approval.
The condo, like any VA home loan property, must be safe, sound and sanitary. In addition to this, the homeowners association (HOA) must be financially stable, which means it cannot be involved in any active litigation, the reserves should be adequate, and the HOA cannot be in bankruptcy.
In addition to this, the HOA cannot have any deed restrictions such as board review of occupants.
For a Federal Housing Administration (FHA) home loan, the rules are similar to the VA, but there is also an owner occupancy requirement. FHA will not allow an HOA to have more than 50 percent of its units be used as rental properties.
An FHA borrower can use the loan on a condo that is under construction, proposed to be under construction, over a year old, or a conversion project such as an old office building that has been changed into living units.
In order to use an FHA loan, condos need to be in a building with 75 percent or more residential units, a minimum of two residential units and can be detached.
The FHA home loan can also be used on manufactured housing if the property is considered a condo by the county in which it’s located. If any units in the building are used as a hotel, motel or time share, the U.S. Department of Housing and Urban Development (HUD) will not approve it.
Assisted living facilities can’t be considered a condo or applicable for use under the FHA loan program, either. The only exception to this rule is if the HOA was approved prior to becoming an assisted living facility.
Those familiar with the U.S. Department of Agriculture (USDA) home loan will know it may be used on a modest, single-family home. It is also eligible for use on a condo, but it must meet certain requirements.
Falling in line with the FHA home loan, a USDA loan cannot be used for a hotel or motel condo complex or houseboat. The complex also cannot have any businesses attached to it that the HOA is making a profit off of, such as a restaurant or store on a ground level.
Obviously, the condo needs to be in a geographic area approved by the USDA for the loan (usually where the population is less than 10,000).
Otherwise, the condo must be 1,800 square feet or less, and the condo cannot be used for any undertakings that will yield income. Your client must obtain not only homeowners insurance but also flood insurance for a USDA-approved condo, and the HOA fees must fall within the borrower’s approved debt-to-income ratio (DTI).
Condo IDs for federal home loans
A condo ID is essential in the process of getting your client one of these properties. The good news is that if you have a client with a VA home loan, the ID for those properties does not expire. The potentially annoying news is that there are expiration dates for condo IDs with the FHA home loan.
An approval of a condo project from the FHA is good for two years. If a USDA condo ID is needed, you will use a condo ID from either a VA-approved, Fannie Mae-approved or FHA/HUD-approved property. But the condo must be in a designated rural area and meet specific qualifications.
Owner occupancy
It is required with any federal home loan that the single-unit condo being obtained by your client is their primary residence. They will be required to state intention to occupy the unit as their primary residence. They may not buy the home just to rent out their property to others.
There are exceptions, however. If they were obtaining a multiunit property with up to four units with the FHA or VA home loans, then they can rent out the units as long as they occupy one of them.
Additionally, an owner of a residence financed with a federal home loan may move out of the home and rent it but only after they have occupied the home as their primary residence.
With the FHA and VA, the primary homeowner must usually live in the condo within 60 days. This rule is also valid for USDA home loan holders.
With the VA home loan, if the loan applicant will be deployed at the time of closing, they can provide proof of discharge for deployment and intent to occupy the home within a year of closing.
As long as their immediate family occupies the home at that time, this is an acceptable exclusion to the rule.
Hopefully, this will help you navigate getting a condo for your clients.
If you have any questions, please feel free to leave them in the comments section below or to tweet @FedHomeLoan.
Amanda Rosenblatt is a writer for Federal Home Loan Centers, as well as VA Home Loan Centers. She is based in San Diego and loves helping educate potential homeowners.