A buyer in California is purchasing a condominium using an FHA loan. The lender states the condominium project must appear on the FHA-approved condominium list before the loan can close. What is the primary reason FHA requires project-level approval for condominiums?
Correct Answer
B) To verify that the HOA maintains adequate financial reserves, sufficient insurance coverage, and acceptable owner-occupancy ratios
FHA condominium project approval — governed by HUD guidelines (Mortgagee Letter 2019-01 and subsequent guidance) — evaluates the financial health of the entire project, not just the individual unit. Key criteria include adequate HOA reserve funding (generally at least 10% of the budget), hazard and liability insurance meeting FHA minimums, and owner-occupancy ratios (typically at least 50% of units must be owner-occupied). These requirements protect both the borrower and FHA's Mutual Mortgage Insurance Fund from risks associated with financially unstable HOAs.
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Related Topics & Key Terms
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Related Concepts
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Closing costs are the fees and expenses paid by the buyer and seller at the closing of a real estate transaction, beyond the purchase price. They typically range from 2-5% of the purchase price.
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