FHA Loans and Condo Conversion Projects

September 30, 2011

FHA loans are available for condominiums--a fact that surprises some FHA loan applicants, but is a fairly common FHA insured mortgage option. The definition of a condo project, for FHA loan purposes, is simple. A condo is a property with ownership titles for individual units within the property, as opposed to a single ownership for the entire building.

The FHA has rules for condo loans, including a requirement that the condo be on a list of projects approved by the FHA. There are also FHA requirements for new construction condos and condo conversion.

What's a condo conversion project? Some building owners decide to convert their property into condominiums and sell the individual units. The FHA will consider such conversion projects for approval if the condo project and its individual units meet FHA standards.

The rules for condo conversion include a "one unit, one residence" requirement; each must be a separate entity. FHA rules don't permit multiple dwellings inside a single condo unit.

A frequently asked question on such projects--will the FHA will insure condo units in a conversion project that has not been completed yet?

According to FHA rules, "Conversion to condominiums occurs in those projects which involve changing the title of an existing structure generally under one title, to property that is separated into units so that the title to most units can be held separately. In the event that FHA is insuring a mortgage on a unit and an undivided interest in the common elements on a project undergoing conversion, remodeling or rehabilitation, the entire condominium project, including the common facilities must be 100 percent completely built before any mortgage may be endorsed."

FHA condo standards are designed to protect the buyer and the lender's investment. If the unit for sale in a finished conversion project can't meet minimum property requirements for example, such a situation could put the borrower's investment at risk, or even his or her safety. It's not possible to evaluate such conditions until the conversion is done.

Having a completed project also insures the entire property meets FHA requirements, not just individual units. The overall condition of the rest of the project could affect the resale value of the unit sold with an FHA insured mortgage--a risk most reputable lenders wouldn't be willing to take when it comes to an in-progress conversion.

There are also minimum property standards to think about--FHA rules state, "The condominium project must be primarily residential, contain at least two (2) dwelling units and can be detached, semi-detached, a row house, a walk-up, mid-rise, high-rise, including those with or without an elevator, or manufactured housing." There is no way to determine whether a condo conversion project meets such requirements until the work is finished.