Do Townhomes Need to Be FHA Approved?

The Federal Housing Administration (FHA) loan program facilitates homeownership for many individuals across the United States. These loans are designed to make financing more accessible, particularly for first-time homebuyers or those with limited savings. FHA loans achieve this by offering attractive terms, such as lower down payment requirements and more flexible credit guidelines, compared to many conventional loan products. The government insures these loans, which protects approved lenders from potential losses if a borrower defaults.

Understanding FHA Loans and Property Approval

An FHA loan is a mortgage insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). This government backing allows private lenders to offer loans with more accommodating terms than traditional mortgages. For instance, borrowers with a credit score of 580 or higher can qualify for a down payment as low as 3.5% of the purchase price, while those with scores between 500 and 579 may still qualify with a 10% down payment.

A core aspect of FHA loans is the requirement for the property to meet specific standards. Any home purchased with an FHA loan must undergo an FHA appraisal to ensure it meets the agency’s Minimum Property Standards (MPS). These standards dictate that a property must be safe, structurally sound, and secure, safeguarding both the borrower and the government’s investment.

The FHA appraiser evaluates various elements, including the functionality of major systems like heating, electrical, and plumbing, and the condition of the roof, which must have at least two years of remaining life. The property also needs safe access from a public or private road and must be free from hazards such as peeling lead-based paint or wood-destroying insect infestations. If a property does not meet these standards, it will not be eligible for FHA financing.

For townhomes, FHA approval is required when a buyer uses an FHA loan for financing. If a buyer secures a conventional loan or pays with cash, FHA property approval is not needed. The FHA’s involvement in insuring the mortgage requires the property to meet its established criteria to mitigate financial risk.

FHA Approval for Townhome Communities

For many townhomes within a homeowners association (HOA) community, the entire community or project requires FHA approval, not just the individual unit. This project-level approval ensures the financial health and structural integrity of shared elements and the managing association. The FHA protects its insured loans by ensuring the property’s value is stable and well-maintained.

Several criteria must be met for FHA project approval. One criterion is the owner-occupancy rate, with at least 50% of units owner-occupied. This threshold can be reduced to 35% under certain conditions, such as robust financial stability.

The HOA’s financial health is another criterion. The association must maintain adequate reserve funds, with at least 10% of its annual budget held in cash reserves for future repairs. A community’s delinquency rate on HOA dues must be low, with no more than 15% of units 60 days or more delinquent.

Insurance coverage is also required, encompassing hazard, liability, and flood insurance where applicable. For communities with 20 or more units, fidelity bond insurance is required, covering at least three months of aggregate assessments plus reserves. The FHA also limits commercial space within the project, generally not exceeding 35% of the total floor area.

The approval process can be initiated by the HOA, a developer, or a lender. It involves an eligibility review and the preparation and submission of various documents, including financial statements, reserve studies, and legal governing documents. The application is submitted to the FHA through either the HUD Review and Approval Process (HRAP) or the Direct Endorsement Lender Review and Approval Process (DELRAP), and the process can take several months.

While many townhome communities are approved as condominium projects, some are structured as “site condos” or “detached condos.” These properties, resembling single-family homes but sharing common elements managed by an HOA, are treated differently by the FHA. Depending on their legal structure, some detached units might not require project-level FHA approval, instead being treated more like individual single-family homes for FHA financing.

Checking for FHA Approval and Implications

For prospective homebuyers, determining if a townhome community is FHA-approved is a first step. The U.S. Department of Housing and Urban Development (HUD) provides a publicly accessible search tool on its website. This tool allows individuals to search for FHA-approved condominium projects by state, county, city, ZIP code, or community name.

If a townhome community is not FHA-approved, a buyer seeking FHA financing cannot use that loan product. Buyers would need to explore alternative financing options, such as conventional loans, which require higher down payments and stricter credit qualifications, or cash. The inability to use FHA financing can limit the pool of potential buyers, affecting property values and increasing listing times.

A non-approved community may seek FHA approval, but this is a complex and time-consuming process. It involves the homeowners association or developer gathering documentation and ensuring the community meets all FHA requirements, which can take several months. An individual buyer cannot initiate this approval process for an entire community.