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Read our collection of guides and articles about refinancing to help you on your mortgage journey.

![Two Semi Circles Inside Dark Green Box: One of Person On Phone Reviewing Document and One of a House](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F11dbcc29890841259334f642f25796d9)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">What home equity is,  how you earn it, and different options for tapping into it
</p>

<p class="learnfont">The difference between home equity loans, home equity lines of credit, and cash-out refinances</p>

  <p class="learnfont">How to determine which home equity option is right for you</p>

  </div>

<h2>Deciding between home refinance vs home equity loan? This guide will help you understand the nuances and benefits of each option, enabling you to leverage your home equity effectively.</h2>

You worked hard, saved up, and bought your dream home. You’ve been consistently paying your mortgage and now you're starting to think about new financial goals—like home renovations, [debt consolidation](https://better.com/content/cash-out-refinancing-gives-you-options/), or even putting money toward your child’s college tuition.

But if you’re diverting the majority of your cash flow to mortgage payments, it might not leave much left over to cover these other goals. Luckily, there’s a way to leverage your [home itself](https://better.com/content/cash-out-refinancing-gives-you-options/) and generate  liquid assets (aka, cash)—this can be done by tapping into your home equity. Discover the nuances of home refinance vs home equity loan options and how using equity to refinance can turn your home's value into cash.

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<h2>What is home equity and how to earn it</h2>

Your home equity is the portion of your home that you own—you can calculate this by measuring the value of your home minus the amount of money you still owe on your mortgage. For example, if your home is worth $250,000 and your current loan balance is $150,000, then you have $100,000 in home equity:

![Chart with Equation and Example Figures: Estimated Home Value - Outstanding Mortgage Balance = Home Equity](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F7d403c6e828045beb7e4fd8bfd01d01a)

There are a number of ways your home equity can grow. The first and most obvious way to grow your home equity is by making your monthly mortgage payments.  Every time you make a mortgage payment and reduce the outstanding principal balance of your loan, you essentially “buy back” a portion of your home’s value from your mortgage lender.

Your equity can also increase if the [appraised value](https://better.com/content/can-messy-home-affect-appraisal/) of your home goes up. The easiest way to make this happen is through home improvements and renovations, but it can also occur naturally over time housing appreciation and housing market fluctuations. Whatever the reason, when the value of your home increases, the difference between that value and your mortgage loan balance also gets bigger, and the difference is your earned home equity.

<h2>So, how do you turn home equity into cash?</h2> 

There are 3 main ways you can access your home’s equity: Taking out a home equity loan (HEL), opening a home equity line of credit (HELOC), or doing a cash-out refinance. Here’s what you need to know about each scenario, and how to decide which one is the best fit for your financial situation.

<h2>Tapping into your home equity with a HEL or HELOC</h2>

Home equity loans and home equity lines of credit are both [second mortgages](https://better.com/content/when-and-why-would-i-need-second-mortgage/) that use the equity in your home as collateral. However, there are some key differences between them:

<h4>Loan terms</h4>

A home equity loan is a second mortgage with a separate term and repayment schedule from your existing mortgage. HELs typically offer repayment terms of 15 or 20 years. You can repay the balance early without penalty and once you finish paying it off, the loan is closed.

A home equity line of credit is a second mortgage with a separate term and repayment schedule from your existing first mortgage, but unlike HELs, HELOCs allow you to draw cash as needed rather than in one lump sum. These cash draws are available for the first 10 years of the loan, which is called the “draw period.” After that, there is a 20-year repayment period when the credit line is no longer available and you’ll pay back the balance of the loan. You can also choose to repay any portion of the balance at any time without penalty and still access the credit line within the draw period.

<h4>Interest rates and closing costs</h4>

The interest rate you lock in for your home equity loan is fixed—meaning you can’t renegotiate down the line. HEL rates are typically higher than 30-year fixed-rate mortgage rates, but closing costs for these loans are substantially lower because there are  fewer operational and processing costs and the loan amounts are smaller.

Home equity line of credit interest rates can fluctuate according to changes in the U.S. Prime Rate throughout the life of the loan. However, you’ll likely pay very little or even nothing in closing costs. Even with the fluctuating interest rate,  it may still be more cost-effective to use a HELOC for major purchases than charging them to a credit card. Check HELOC terms carefully, as some lenders offer the option to convert to a fixed-rate during the repayment period.

<h4>Receiving and using funds</h4>

When you get a home equity loan, you’ll receive the loan disbursement in full as one lump sum, which is wired to a bank account of your choice. From there, you have the freedom to spend or save the money  in any way you choose in whatever time frame you decide.

 A home equity line of credit works differently. A line of credit lets you withdraw funds at any time and for any purpose during the 10-year draw period. You may receive a checkbook or a debit card that gives you access to the credit line. There are no restrictions on how or when you use the money once it’s drawn.

<h2>Using equity to refinance: What you need to know</h2>

Using equity to refinance can be a strategic move for homeowners looking to consolidate debt If you’d rather not take out a second loan on your home, you can access your home equity with a cash-out refinance. Here’s how it works:

<h4>Loan terms </h4>

With a cash-out refinance, you essentially take out a new mortgage greater than the balance of your existing loan, but less than your home’s market value. This allows you to pay off the remaining balance of your existing mortgage and “cash out” your additional home equity. The new loan will result in a new interest rate and loan term, along with a new repayment schedule—typically somewhere between 15 and 30 years depending on the loan you choose. Keep in mind that acash-out refinance may be subject to, prepayment penalties; while it’s not common, it depends on the lender and loan so make sure you factor that into the cost of your refi if applicable.

<h4>Interest rates and closing costs</h4>

Cash-out refinance loans may offer [fixed or variable interest rates](https://better.com/content/what-is-an-arm/). While closing costs are higher than both the HEL and HELOC options, it might be cheaper overall to leverage your equity through a cash-out refinance. Making payments on a single loan may be substantially more manageable than making payments on your original mortgage plus the second mortgage (HEL or HELOC) combined. To compare the costs of both options, calculate how long it will take you to break even on your cash-out refinance. Also look at the monthly payment amounts to make sure you have the budget capacity to manage the extra debt. 

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<br>

<h4>Receiving and using funds</h4>

Similar to a home equity loan, a cash-out refinance offers you a lump sum at closing. Your new loan pays off your existing first mortgage and then disburses the difference in the remaining funds (the “cash-out”) as a check or into a bank account of your choosing. You may spend or save loan proceeds in any way you choose in whatever time frame you decide.

<h2>Understanding how much you can borrow</h2>

Lenders will usually allow you to borrow up to 80% of your equity with a cash-out refinance and between 80 to 90% of your equity with a HEL or HELOC. 

![Step 1 and Step 2 on How to Calculate Maximum Amount of Equity That Could Be Borrowed, and Total Amount You Can Borrow](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F2407bf4a56f949799edb8038d4cb8c91)

So, using the same numbers from the original example, if your home is worth $250,000 and you have an outstanding mortgage balance of $150,000, then you could end up with around $62,500 if you took the maximum loan amount (85% of total equity in this example):

![$250,000 x .85 = $212,500 and $212,500 - 150,000 = $62,500](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F909a96211cd44383b1e819cd4cb75516)

This is a basic example for illustration purposes. Your final amount may be less due to closing costs or any other expenses associated with each loan.

<h2>Cash out refinance vs HELOC vs refinance</h2>

Although each of these 3 options allow you to tap into the equity of your home, their features and terms vary. Here is a [heloc vs cash out refinancing calculator](https://better.com/heloc-vs-cashout-refi-calculator) that can help with your decision making. 

![Chart with Green Checks Showing the Benefits that Come with a Home Equity Loan, HELOC, and Cash-Out Refinance](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F6bafc65d4ba44db0825e136a70ca2bbc)

The best loan for you will depend on your needs and your financial circumstances, but there are certainly pros and cons to each option. Take a look at the following breakdown of advantages and disadvantages to see how they might impact your decision:

<h4>Pros and cons: Home equity loan</h4>

<strong>Pros:</strong> 

- Fixed interest rate and predictable payments
- Closing costs may be lower than a cash-out refinance of your first mortgage

<strong>Cons:</strong>

- Loan is closed once paid, no reusable credit line 
- Typically comes with higher rates than a cash-out refinance and higher closing costs than a HELOC 
- Additional payment on top of your monthly mortgage, and adds a lien to your property behind your first mortgage lien

<h4>Pros and cons: Home equity line of credit</h4>

<strong>Pros:</strong>

- Flexibility to use available credit as needed, and only pay interest on the money you use 
- May offer interest-only payments during the draw period

<strong>Cons:</strong>

- Variable interest rates could mean costs go up over time
- Easy access to cash may tempt you to overspend, if you’re not disciplined
- Creates an additional payment on top of your monthly mortgage, and adds a lien

<h4>Pros and cons: Cash-out refinance</h4>

<strong>Pros:</strong>

- Usually the lowest interest rates compared to HELs or HELOCs 
- If you plan to stay in your home for a while, may be more cost-effective over time depending on the break-even point
- You will only have to make one mortgage payment
- Pays off and replaces existing first mortgage; assumes place as a new single lien 

<strong>Cons:</strong>

- Closing costs may be a bit higher
- Lenders may not allow you to take as much cash against your equity (~80% vs. 85-90% with a HEL or HELOC)

<h2>Which home equity option is right for you?</h2>

Among HELs or HELOCs and cash-out refinances, you may find that one option serves you better than the others. Here are a few scenarios to consider:

<h4>When you know exactly how much money you need, and it’s a small amount:</h4> 

If you don’t need all your available home equity, or if you’d be tempted to overspend by a HELOC’s open access to funds, then a cash-out refinance or home equity loan (HEL) might be best. Comparing the costs, payment structure, and different [break-even points](https://better.com/content/refinance-calculator/) between the two loans will tell you which is the smarter move.

<h4>When your plans are uncertain, and you want flexibility:</h4> 

If you don’t know the specific dollar amount you will need or prefer to have access to cash as you need it, then a HELOC may work best for you. While rates are variable, they are substantially lower than credit cards, and may be convertible to a fixed rate during the repayment period, depending upon the lender. 

<h4>When you need a large sum and plan to stay in your home for a while:</h4>

In this scenario, a cash-out refinance could be the best option. If you can snag a significantly lower interest rate, you might be able to offset the  higher closing costs over the long term. Not only that, but by consolidating your original mortgage and your home equity withdrawal, you’ll only have to worry about a single mortgage payment each month.

A cash-out refinance can be especially beneficial if mortgage rates have dropped since you took out your original mortgage or [refinanced previously](https://better.com/content/how-often-can-you-refinance-your-home/). This can lower your cost of borrowing and allow you to access cash from your home equity at the same time. Win-win! Enter your details, a new interest rate, and loan type in Better Mortgage's [cash-out refinance calculator](https://better.com/content/cash-out-refinance-calculator) to see how much you can cash out.

Want to get your personalized refinance rates and start planning your financial future? Check your rates today.

#### More questions? Related FAQs

- [What type of refinance loans does Better Mortgage offer?](https://better.com/faq/refinancing-your-mortgage/what-type-of-refinance-loans-does-better-mortgage-offer/) 
- [How will I get my cash out funds?](https://better.com/faq/title-and-settlement-services/how-will-i-get-my-cash-out-funds/) 
- [Is a cash-out refinance right for you?](https://better.com/content/is-a-cash-out-refinance-right-for-you/) 
- [What closing costs can I expect when I refinance?](https://better.com/faq/refinancing-your-mortgage/what-closing-costs-can-i-expect-when-i-refinance/)

<br> <br>

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Want to access the equity in your home? You have 2 options: taking out a second mortgage or doing a cash-out refinance. Let’s compare the benefits of both.

Home Refinance vs Home Equity Loan: Key differences

Blog post image for Home Refinance vs Home Equity Loan: Key differences

![Learn about a good debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fed9faca9999f4ad2aea95c52bcba5236)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">What a debt-to-income (DTI) ratio is</p>

<p class="learnfont">Why DTI matters when buying a home</p>

  <p class="learnfont">How to calculate your debt-to-income ratio</p>

  <p class="learnfont">What mortgage lenders consider a good DTI and how to lower yours</p>

  </div>

## Table of contents

- [What is a debt-to-income ratio for mortgages?](#1)
- [How to calculate debt-to-income ratio for a Mortgage](#2)
- [DTI Requirements by Mortgage Type](#3)
- [What is a good debt-to-income ratio for a mortgage?](#4)
- [Conventional loan DTI requirements](#5) 
- [FHA loan DTI requirements](#6)
- [How to improve your DTI ratio](#7)

When you apply for a mortgage or any other type of loan, the top three things lenders look at are your income, your credit score, and your debt-to-income ratio, or DTI.
The first two are fairly self-explanatory—but what is DTI? And how do lenders use it in the mortgage process?

In short, your DTI is the balance between all the money you have coming in every month (income) and how much you’re obliged to pay every month to creditors (debt). This helps lenders know how safe or risky it would be to approve your loan.

Below, we’ll help you understand all the factors that make up your DTI, how to calculate it for yourself, and how to optimize it to get the best terms in your mortgage.

<div id="1"></div><h2>What is a debt-to-income ratio for mortgages?</h2> 

A DTI ratio simply represents how much of your gross monthly income is spoken for by creditors, and how much of it is left over to you as disposable income. 

It’s most commonly written as a percentage. So, for example, if you pay half your monthly income in debt payments, you would have a DTI of 50%. 

<div id="2"></div><h2>How to calculate debt-to-income ratio for a Mortgage</h2> 

Okay easy enough, but your ratio is likely not as clear-cut as “half your income” (and, as you’ll see later on, ideally it’ll be much less). How do you calculate your debt-to-income ratio? There’s math involved, but thankfully it’s pretty basic (no trigonometry required).

Simply divide all your monthly debt payments by your gross (pre-tax) income, and then multiply that number by 100. This will give you your DTI percentage.  

![Formula for calculating your debt-to-income ratio](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F16baf6fd48da4deea516590cbeed3ca6)

In some cases, what constitutes “income” and “debts” is clear-cut. In other cases, not so much. Generally, lenders follow these guidelines for what to include for each. 

__Debt__ includes:

- Future or estimated monthly housing expenses (mortgage payment, homeowners insurance, property taxes)

- Student loans

- Auto loans

- Personal loans

- Minimum required credit card payments 

__Income__ includes:

- Pre-tax monthly salary (determined by dividing your annual salary by 12)

- Income from additional jobs or side hustles

- Revenue from rental property or other investments

- Regular income from annuities, trust funds, and retirement accounts

- Any child support or alimony payments you receive

Let’s look at a real-world example:

![How to calculate your debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fa8e85d916c06432988ffc7343ae72bcd)

<p class="legal">The above scenario is for illustrative purposes only.</p>

<div id="3"></div><h4> DTI Requirements by Mortgage Type</h4>

Different types of mortgages have their own DTI requirements. For example, at Better Mortgage, the maximum DTI for FHA loans is 55%, and 50% for Conventional loans, while VA loans do not have a set maximum. It's important to understand these requirements when considering different mortgage options.

<div id="4"></div><h2>What is a good debt-to-income ratio for a mortgage?</h2> 

The lower your DTI, the better—this means less of your income is tied to recurring debt payments, and you’ll likely be more able to continue making payments on time even if you experience a minor financial setback. Borrowers with higher debt obligations relative to their incomes are less able to absorb those setbacks, and are at greater risk of defaulting on their loan. This is why high DTI is the [#1 reason](https://www.corelogic.com/intelligence/buy-stories/debt-to-income-is-the-number-one-reason-for-denied-mortgage-applications/ "external") mortgage applications get rejected.

So, what’s the magic number when it comes to DTI? Well, it varies slightly based on the [type of mortgage](https://better.com/content/types-of-mortgage-loans/), the lender, and other aspects of your financial profile.

Typically, though, most lenders prefer to see a DTI of under 36%. In other words, the total of your monthly debts, including your estimated monthly mortgage payment, will be less than 36% of your monthly gross income. However, it may be possible to get a mortgage with a DTI of up to 50% depending on the lender. If you have a DTI of 50% or higher, then it could be challenging or even impossible to get approved for a mortgage until you [lower your debt-to-income ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/).

![Debt-to-income (DTI) ratio brackets for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F53b282d1d03741d4a43ff67b4718aa51)

<div id="5"></div><h4>Conventional loan DTI requirements</h4>  

A [conventional mortgage](https://better.com/content/conventional-loan-requirements/) is a home loan offered by a private lender—such as a bank or a mortgage company. Private lenders tend to have a little wiggle room when it comes to DTI, depending on the exact loan you’re applying for and your personal situation. But that wiggle room can only go so far, because DTI requirements are typically based on policies created by government-backed lenders like [Fannie Mae](https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios) in order to protect customers. 

While many lenders require a DTI of no more than 43%, some lenders, including Better Mortgage, can provide mortgages to borrowers with DTIs up to 50%. This means even if your DTI is 49.999%, you could be eligible for a home mortgage loan.

<div id="6"></div><h4>FHA loan DTI requirements</h4>

[FHA loans](https://better.com/content/fha-homeready/) are mortgages backed by the Federal Housing Administration (FHA) and offered by an approved list of lenders (including Better Mortgage). The FHA is a government organization that insures these loans if their borrowers default. 

FHA mortgages require a lower minimum down payment and credit score than many conventional loans. This flexibility helps make homeownership more attainable for first-time homebuyers or those with lower income levels who may be ineligible for conventional loans. 

The maximum DTI for FHA loans is usually up to 50%, though this [may go higher](http://www.fhahandbook.com/debt-ratios.php "external") if you can meet other compensating factors. 

<div id="7"></div><h2>How to improve your DTI ratio</h2>

If you’ve run the numbers and you’re concerned that your DTI isn’t as low as you’d like it to be, there are two main ways you can decrease it: reduce your debt or increase your income. [Lowering your DTI](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) can make the mortgage process go smoother, so it might be worthwhile if you have time before you apply for a new mortgage or refinance. 

Here are a few DTI reduction strategies to consider:

- Pay down or pay off your car loan before applying for your mortgage.

- Start paying off your credit cards in full, one by one. (Just don't close the cards after you pay them off, as this can hurt your credit score.)

- If possible, refinance or consolidate current loans to reduce your monthly payments.

- Consider adding a [co-borrower](https://better.com/content/should-you-add-a-co-borrower-to-your-mortgage/) with a low DTI to your loan.

- Pick up a side gig or part-time job to help pay down debt.

- Expecting a raise or promotion in the next few months? Consider waiting to apply until it goes through.

- Consider using some of your down payment savings to pay down debt. Just make sure you’ll meet down payment guidelines, which can be as little as [3% to 5%](https://better.com/content/5-percent-down-payment/).

## Get clarity on your DTI with a pre-approval

At Better, we want you to be as prepared for buying a home and the mortgage process as possible.

Applying for a [pre-approval](https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=what-is-good-dti) takes as little as 3 minutes and will provide you with a clear picture of how much you can afford. You’ll undergo a soft credit check (which doesn’t affect your score) that allows our underwriters to look at your debts, income, and credit in detail to obtain a more accurate picture of your DTI.

Although your DTI ratio is just one important factor to consider when buying a home, carrying less debt relative to your income will make it easier to get a mortgage and help ensure you’ll be able to afford your home for years to come.

Better Mortgage can help you understand your DTI and the financing options available to you. Start your pre-approval process today.

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Learn all about what a debt-to-income ratio (DTI) is, what a good debt-to-income ratio looks like, and why it matters when taking out a home mortgage.

What is a good DTI ratio for a home loan?

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![Purple Image with an Ellipse with the Front of a Condo Within and a Half Golden Circle to the Right](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F4e50b45919444ef781f46d18a8f88d08)

# Discover how FHA condo approvals work, including loans and eligibility criteria. 

Dive into our blog for all the details.

## What is FHA condo approval and why is it necessary?

FHA condo approval is a certification process that allows condominium projects to become eligible for FHA-insured loans. It ensures that the condo project meets certain standards and requirements, providing assurance to lenders and buyers that the property is financially stable and a good investment.

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">The kinds of condos you can buy with an FHA loan</p>

<p class="learnfont">How to qualify for an FHA loan</p>

  <p class="learnfont">What to do if the condo you want isn’t FHA approved</p>

  </div>
  <br><br>

If mowing the lawn, cleaning the gutters, or washing windows isn’t your idea of a fun weekend activity, a condo may be the right home for you. Condos typically cost less than single-family homes, you’re only responsible for maintaining the interior, and they’re often located close to amenities. In fact, larger condominium neighborhoods may even have shared amenities such as swimming pools, pet parks, and even golf courses. If you’re a homebuyer with a smaller down payment, lower credit score, or higher DTI, an FHA loan could be the way to make homeownership happen. Additionally, condo owners pay condominium association dues for the upkeep of shared common areas, such as garages, pools, outside hallways, gyms, and clubhouses.
Before you make the big decision to let a specific condo steal your heart, it’s important to know about the FHA condo approval process. Not all condos are available to homebuyers with an FHA loan because FHA loans are insured by the Federal Housing Administration (FHA) and there are strict payment requirements for the kinds of condos the FHA will approve. If a condo doesn’t make the FHA’s list, you won’t be able to buy it with an FHA loan. So let’s dig into which condos are FHA approved, how to get an FHA loan, and what to do if the condo you want isn’t on the FHA’s list.

## What is an FHA approved condo?

For a condo to be approved for an FHA loan it must be on the FHA’s list of approved condominium projects. To make the FHA’s approved condo list a condo must meet 3 basic requirements:

- It must be **primarily residential**.
- It must contain at least **two dwelling units**.
- It must be either **detached, semi-detached, a row house, a walk-up, mid-rise, high-rise**, including those with or without an elevator, or manufactured housing.

[In 2019, there were 150,000 condominium projects across the country, but only 6.5% of them qualified for FHA financing](https://www.spglobal.com/marketintelligence/en/news-insights/trending/_rm_ulplkwzhn1akd2gm8a2). Since then, new rules have been introduced to enable individual condo units to be eligible for FHA loans even if the full condo development isn’t approved. This is to increase the number of FHA approved units by up to 70,000 new units per year. Under the new rules, the FHA loan approval process evaluates the entire condominium project, not just the individual unit. Single condos within projects that are not approved can now be approved through a single-unit approval process sometimes called “spot approval.” The FHA loosened its eligibility requirements for condo owners in 2019, allowing individual condo units, including manufactured homes, to be eligible for FHA loans even if the full development isn't approved. This change, known as "spot approval," has opened up more opportunities for condo buyers to secure FHA financing.

Despite the new guidelines, “Condo hotels,” timeshares, houseboat projects, or condos that feature more than one dwelling in a single condominium unit are ineligible for homebuyers who need FHA financing.

## How to find out if a condo is FHA approved

The U.S. Department of Housing and Urban Development (HUD) maintains [this list](https://entp.hud.gov/idapp/html/condlook.cfm) of condominiums that are approved for an FHA condo loan.

To search for FHA approved condos you’ll need the state, county, and maybe the zip code (if you’d like to narrow your search to a more specific area). The list includes condominium projects that are approved, expired, rejected, or withdrawn, so select ‘approved’ status to make sure the condo you’re interested in can be financed with an FHA loan.

If a condo has already caught your eye, all you need is the condo name and state to see if it’s on the list. Alternatively, you could work with an experienced [real estate agent](https://better.com/realestate) who’s familiar with both FHA approved condos and the neighborhood where you’re hoping to buy.

## How a property gets approved for an FHA condo loan

As a homebuyer, this is more of a nice-to-know because no matter how much you want to buy a condo that’s not on the FHA approved condo list, it’s not your responsibility to get the condo FHA approved. The condo developer or their agent is typically responsible for getting their condominium project FHA approved. If the condo has been around for a while, the condo association or their management company submits the condo approval package. Additionally, it is important to note that the condo’s homeowners association (HOA) must have at least 10% of its HOA budget in a cash reserve to meet FHA requirements for commercial use.

If you want to learn about what goes into a condo approval package, or would simply enjoy some “light bedtime reading,” this 95-page [Condominium Project Approval and Processing Guide](https://www.hud.gov/sites/documents/11-22MLGUIDE.PDF) covers all the documentation and requirements the FHA needs to approve a condominium project.

Here are the highlights:

- The condominium project must have adequate insurance coverage
- Commercial space must not be more than 25%, up to a maximum of 55%, 35% of the project’s total floor space, depending on the project. 
- No more than 10% of the total units can be owned by one investor
- The project’s area structures, as well as the housing units themselves, must be complete
- Bylaws and covenants of the condominium must not violate the [Fair Housing Act](https://www.hud.gov/program_offices/fair_housing_equal_opp/fair_housing_act_overview)
- Condos, aka ‘condotels’, that double as a resort-type property are prohibited
- The project must be located a reasonable distance away from transportation infrastructure
- At least 50% of the units must be owner-occupied
- No more than 15% of units in the property can be behind on their homeowners association dues
- The project must have adequate capital reserves

As you can imagine, it can be time-consuming and often costly to get a condo project FHA approved and that’s why most condominium projects forgo FHA approval. Instead, they’re built in the hope that buyers use a [conventional loan](https://better.com/content/conventional-loan-requirements/) to finance their condo purchase.

## FHA condo requirements

There isn’t a specific FHA mortgage condo loan per se. You’ll need to be approved for an FHA mortgage loan and find a condo to buy on the FHA approved condo list. FHA mortgage loans have specific requirements for the types of residences you can buy, so you’ll be pleased to know that if you want an FHA-approved condo to be your primary residence, the property will automatically meet FHA mortgage loan requirements. However, it's important to note that investment properties and vacation homes are not eligible for FHA loans.

To be eligible for an FHA home loan you’ll typically need (keep in mind some requirements may vary by lender):

__A.__ A credit score within the eligibility range based on your down payment amount or even your lender’s specific requirements:

  1. If your down payment is 3.5%–9.9%, you’ll need a credit score above 580

  2. If your down payment is 10%, a credit score between 500–579 will suffice

  3. If applying through Better Mortgage, credit score of at least 580 is required to qualify

__B.__ A [debt-to-income (DTI)](https://better.com/content/3-most-important-numbers-mortgage-application/) ratio of 43% or less

__C.__ Evidence of steady income and proof of employment

__D.__ To make [mortgage insurance premium](https://better.com/faq/home-purchase-loan-costs/what-is-mortgage-insurance-premium-mip) (MIP) payments, in most cases for the life of the loan in most, plus a one-time upfront MIP payment equal to 1.75% of the loan amount


MIP is similar to [private mortgage insurance (PMI)](https://better.com/content/what-is-pmi-or-private-mortgage-insurance/), which borrowers with [conventional mortgages](https://better.com/content/conventional-loan-requirements/) need to pay if their down payment was less than 20%. Conventional mortgage borrowers will automatically stop paying PMI once they’ve reached 22% equity in their home (when they have 20% equity in their home, they can request an end to PMI). MIP, on the other hand, must be paid for the life of most loans. If your down payment is more than 10%, however, you can ask for MIP to end after 11 years of payments.

FHA [home loan requirements](https://better.com/content/conventional-loan-requirements) also allow borrowers to make down payments using gifted money from family or a friend. In this case, a [gift letter](https://better.com/content/how-to-use-a-gift-letter-for-your-mortgage/) will need to accompany the mortgage application to prove that the gift does not need to be paid back.

A range of [mortgage lenders](https://better.com/mortgage) offer FHA home loans and their eligibility requirements may differ. At Better Mortgage, for example, you’ll need a DTI ratio of 50% and a minimum credit score of 580 regardless of your down payment amount.*

## If the condo you want isn't FHA approved, you have options

While there’s no harm in asking if the condo developer or condo association can submit their condo for FHA approval, given that it can take from two weeks to over three months to get an FHA condo approval, it’s unlikely you’ll get a satisfactory result that works with your homebuying timeline.

If you know you’ll need to get an FHA home loan to buy a home, you’ll need to keep looking until you find a condo on the FHA approved condos list or consider buying a single-family home instead.
If an FHA loan does not sound right for you, you’re in luck! You may be eligible for a conventional loan with Better Mortgage. In fact, qualifying first-time homebuyers can get a conventional mortgage with a down payment as low as 3%. As an added bonus, you’ll no longer be limited to buying a condo that’s approved by the FHA. Additionally, if you’re eligible for the Fannie Mae HomeReady program, you may be able to snag a condo with a 3% down payment. However, to qualify for this program, you'll need at least a 620 credit score and income limits will apply.

In as little as 3 minutes, Better Mortgage can show you which types of loans you may qualify for, the homebuying budget you’ll have to work with, and they will match you with a loan consultant to walk you through your options to help you make the best financial decision for you and your family.

<br> <br>

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 <p class="legal">*Eligibility is subject to change.</p>

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