People looking to buy a condo with FHA financing rejoice. HUD has released a new condominium approval process that, among other things, brings back spot approvals.
The policy, which goes into effect on October 15th, 2019, is part of the FHA’s “broader Administration objective to reduce regulatory barriers that currently restrict affordable homeownership opportunities”
In layman’s terms, it means more folks with low credit scores and not a lot of money in the bank will be able to take out a low-down payment mortgage on a condo, instead of being restricted to a single-family home purchase.
That’s an important distinction because condos tend to be considerably cheaper than houses, making them a more affordable option for those with lower incomes.
Per HUD, there are more than 150,000 condominium projects in the United States, but a mere 6.5% of them are approved for FHA financing.
The new policy is estimated to make somewhere between 20,000 to 60,000 condominium units eligible for FHA-insured financing annually.
The FHA’s New Condo Approval Process
- In the past the entire condo complex needed to be approved for FHA financing
- New rule will allow for individual units to obtain FHA financing
- Should make it easier for home buyers to purchase a condo with fewer restrictions
- Also extends recertification requirement for approved condominium projects from 2 to 3 years
Come October 15th, it’ll get easier to obtain an FHA loan on a condominium.
Before this rule was proposed, and as it stands now, if a condo complex isn’t approved for FHA financing, the prospective buyer would need to go a different route to obtain a home loan.
For example, they’d need to apply for a conventional loan instead of an FHA loan. The problem is that the minimum credit score for the former is higher.
We’re talking a 620 FICO score for Fannie Mae or Freddie Mac approval versus a 580 credit score for FHA unless the low score is the result of insufficient credit history (thin file).
In most cases, you’re going to need the 620 credit score for a Fannie Mae- and Freddie Mac-backed home loan.
This has meant that those with lower credit scores were forced to go with an FHA loan, but may have been surprised to find out that the condo they were attempting to buy didn’t allow FHA financing.
Before Fannie and Freddie began offering loans up to 97% LTV, this was even more of a predicament for a home buyer with little in the way of down payment funds since they required a full five percent down.
But that’s all going to change, at least if the condominium complex meets certain requirements.
FHA Spot Approval Guidelines
- Single condo units eligible for FHA financing again
- But certain conditions must still be met
- Including maximum FHA-insured concentration
- And minimum owner-occupancy
Before you get too excited, note that not every condo complex in the nation will allow for single-unit approvals, otherwise known as “spot approvals.”
There are still some important guidelines that must be met in order to obtain an FHA loan on a condo unit in a complex that doesn’t already have FHA approval.
Those rules are as follows:
– The individual condominium unit must be located in a completed project that is not approved
– For condominium projects with 10 or more units, no more than 10 percent of individual condo units can be FHA-insured
– Projects with fewer than 10 units may have no more than two FHA-insured units
Rule number one is a given – if the complex is already approved for FHA loans, a single-unit approval wouldn’t be necessary.
Regarding rule number two above, there are restrictions regarding FHA insurance concentration. Basically, the whole complex can’t have an FHA loan.
In fact, only 10% of the units in a 10+ unit complex can have FHA financing attached for a spot approval. So it’s still not a sure thing.
If the condo complex is small, with less than 10 units, only two of those unit owners can take out an FHA loan.
There are clearly going to be situations where FHA financing is still not a viable solution. But as noted, there are other options like a 3% down mortgage from Fannie Mae and Freddie Mac.
All the more reason to improve your credit score prior to applying for a mortgage to ensure you can take advantage of all financing options without restriction.
With regard to approved condominium projects, the minimum owner-occupancy for most projects is 50%, meaning at least half must be lived in by the owners (this includes second homes).
This can be as low as 30% for new construction and newly-constructed projects, or if other conditions are met.
Additionally, the FHA will only insure up to 50% of the total number of units in an approved condominium project.
One other thing to consider if the complex is mixed-use is that the FHA will require the commercial/non-residential space not exceed 35% of the project’s total floor area.
The new rule also grants HUD flexibility to respond quickly to changing market conditions by adjusting these percentages.
- Acceptable maximum percentages of units with FHA-insured mortgages will be from 25 to 75 percent
- Acceptable minimum level of owner occupancy will range from 30 to 75 percent
- Commercial space will range between 25 and 60 percent of the total floor area
Changes in the upper and lower limits of these ranges would be published for 30 days of public comment.
Ultimately, even once this new rule is implemented, it could be tricky obtaining an FHA loan on a condo. But this will certainly improve a borrower’s chances of approval.