Federal Housing Administration (FHA) condo loans are a 30 year fixed-rate loan with a very low 3% down payment. The only loan with a lower down payment is a VA loan, which is 0% down, but you have to be a veteran to qualify. FHA condo loans are great for first time buyers because they make it easier to save up a down payment. 100% of closing costs for the sale can be a gift from a relative, seller, or government agency.
Anytime you are putting less than 20% down payment expect to pay private mortgage insurance. FHA condo loans have Mortgage Insurance.
The federal government this year lowered the amount of FHA mortgage insurance from 1.35% of the loan to 0.85%.
Unlike Normal Mortgage insurance the FHA PMI never goes away, it remains for the life of the loan. This is a real downside of the FHA loan programs currently.
From 1996 to 2010 the FHA permitted spot loans on condo projects. “Spots” meant that FHA could review and approve a single condo and approve it as oppose to approving the whole building. The program changed in 2010 and they got rid of the spot program. Now you can only get an FHA condo loan on an approved building.
Check FHA Loan Limits anywhere here: https://entp.hud.gov/idapp/html/hicostlook.cfm
- The project must be on HUD’s approved condominium list:
https://entp.hud.gov/idapp/html/condolook.cfm (not viewable on mobile)
The elimination of the spot program is a real bummer for people looking to purchase with a FHA condo loan today. In Los Angeles there are very few buildings who have went through the arduous process of getting their Building FHA approved. There are a few reasons why this is: The FHA in the past has had low loan limits, so only low priced Condo projects sought approval. Now with FHA loan limits very high ($729,750) as compared to what they were ($362,790), there are a lot of Condo projects that never went through the approval process. Under normal circumstances, the builder would be the one who got a project approved, which would help them to sell the properties. But if the project was outside of the loan limits then there would not have been a reason for the builder to go through the hassle. The second reason that many condo projects in Los Angeles are not approved is that over the past several years there were many other types of financing available that allowed home buyers to purchase a home with as little as $0 down. At the time FHA required 3% down payment. FHA financing was rarely used in Los Angeles because of the easy financing available with these other programs. The lending environment has changed dramatically since 2004-2007 and those easy financing programs are gone now.
The changes made in the past five years have made the FHA condo loan program much less useful then it was in the past, I am hopeful that the FHA makes changes to elimate PMI for life of the loan, and streamline the process for getting condo buildings approved.