Posted 09/29/2017

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FHA approved condos — Complete 2017 guidelines and updates

FHA Approved Condos - Rule and FHA Requirements

Gina Pogol

The Mortgage Reports Contributor

FHA approved condos

FHA approved condos are condominiums which meet the mortgage insurance guidelines of the Federal Housing Administration and, therefore, are eligible for FHA mortgage financing. FHA approved condos generally feature a high concentration of owner-occupied units, a strong condo association balance sheet, and are free of litigation.

FHA mortgage rates for condos

FHA loans are an important part of today's housing market -- both for single-family homes and for condos.

FHA loans are the cheapest, most-accessible low-downpayment home loan for many U.S. borrowers and FHA mortgages account for more than 1-in-5 closed loans monthly.

Meanwhile, that percentage is expected to rise.

Lenders have actively lowered FHA minimum credit score requirements to as low as 580; and the FHA has lowered its mortgage insurance premiums on all new loans, which reduces "effective" FHA mortgage rates for first-time buyers, repeat buyers, and refinancing households, too.

Verify your new rate (Nov 19th, 2017)

Allowing more rental units helps condo buyers and sellers

One challenge for condominium owners and buyers is the difficulty of financing them with FHA home loans. To be eligible for FHA financing, developments must meet strict guidelines.

One of those requirements, a restriction on the number of rental units allowed, has been relaxed -- to the cheers of homeowners and real estate agents.

The new rule is part of the "Housing Opportunity Through Modernization Act of 2016," and goes into effect immediately.

It raises the maximum allowable percentage of rental / investment condo units from 50 percent to 65 percent. This makes a huge difference in many areas, especially resort towns with lots of holiday rentals.

To take advantage of the new guideline, the community must comply with all other FHA condo requirements and meet these additional criteria:

  • The project has replacement reserves of at least 20% of the budget,
  • No more than 10% of the units are in arrears (more than 60 days past due), and
  • The condo has three years of acceptable financial documents.
  • The project must be at least 12 months old.

Owner-occupancy requirements are less stringent for condominium communities that are proposed, under construction, less than 12 months old, or “gut rehab” conversions.

For these projects, 30 percent must be owner-occupied. The National Association of Realtors (NAR) has been lobbying for a relaxation of condo approval rules for some time, and welcomes the change.

FHA redefines "owner occupant"

Previously, only units being occupied by owners as their primary homes were considered "owner-occupied" for project approval purposes.

Effective immediately, vacation condos or units occupied by family members will be counted as owner-occupied. All units will be counted as owner-occupied unless they are:

  • Occupied by a tenant
  • Vacant and listed "for rent"
  • Vacant and listed "for sale"
  • In escrow to a buyer who does not plan to live in the unit or use it as a second home.

This change, which is temporary and expires in one year, will benefit owners even in projects that don't qualify for the 65 percent non-owner-occupancy because redefining "owner-occupied" may allow buildings that could not previously be approved to now qualify for FHA home loans.

How to get a condo "FHA approved"

In order to get a condo building "FHA-approved", the FHA requires specific documentation which varies based on the condo building's history.

Getting a condo "FHA-approved" can take as little as two weeks and as long as three months or more. The best way to get a condo FHA-approved quickly is to have the required paperwork handy, and ready to submit to the Federal Housing Administration.

Note that getting a condo FHA-approved is not the home buyer's responsibility. Typically, the responsibility falls to the developer of the condo or an agent for the developer. For more established condo buildings, a condo association or management company will typically take the lead.

Requirements for proposed condo buildings which are not yet built

Condos which are not yet built or developed are required to send the largest set of documentation to the FHA as compared to other building types. This is because the building has no "history". Developers will often begin the FHA condo approval process as part of the construction planning process.

To get an unfinished condo building FHA-approved, the following information is required:

  1. An application for environment review, using HUD Form 92250
  2. A document describing the type of condominium structure, number of proposed units, and common facilities
  3. A location map
  4. A preliminary site plan
  5. An Equal Opportunity Employment certificate, using HUD Form 92010
  6. An Affirmative Fair Housing Marketing Plan
  7. A letter from the state Historic Preservation Office stating that the project is "acceptable"

Once these items are submitted, the FHA may request additional supporting documentation which may include condominium legal documents; a proposed operating budget for the building, including reserves; and, a proposed management plan.

Builders may also be asked to certify that condo units were constructed in accordance with local building codes; and to provide an architect's certification of the construction of the building.

Lastly, condo developers should be prepared to provide the FHA with a survey showing the exact location of all on-site improvements plus existing utility easements; and, a one-year warranty against faulty materials or workmanship.

Requirements for buildings existing less than one year

For buildings under construction, and buildings which have been completed for less than one year, the process to get FHA-approved as a condo is a little less stringent.

A key point with newly-built condos or condos under construction is that unless the building has a 10-year warranty in place at least, home buyers are limited to 90% loan-to-value on their home loan. This goes against the FHA's official 3.5% downpayment allowance so it's important for buyers to understand the policy.

To get a "new" condo building or a building under construction FHA-approved, the following information is required:

  1. A document describing the type of condominium structure, number of proposed units, and common facilities
  2. A location map
  3. A recorded project plat, map, and/or air lot survey which identifies condo units
  4. The developer's plan and schedule for development
  5. Condominium legal documents
  6. A proposed condominium association budget
  7. A management agreement or proposed management plan
  8. A current financial statement of the condominium project, including reserves
  9. Minutes from the last two condo association meetings, if they exist

In addition, the FHA may request appraisals of individual units; certifications from inspectors; and a construction warranty which shows for how many years the building's workmanship is guaranteed.

Verify your new rate (Nov 19th, 2017)

Requirements for existing buildings for which the developer has not turned over control to the condo association

For condo buildings which have been completed for longer than one year, and for which some of the units remain unsold or the developer has yet to relinquish control to the condo association, a different set of steps is required to seek FHA condo approval.

To get an existing condo building with unsold units or a developer-controlled association FHA-approved, the following information is required:

  1. A document describing the project
  2. A location map
  3. A recorded project plat, map, and/or air lot survey which identifies condo units
  4. Condominium legal documents
  5. A condominium association budget
  6. A management agreement
  7. A current financial statement of the condominium project, including reserves
  8. Minutes from the last two condo association meetings, if they exist
  9. Evidence of completion of the project, usually an occupancy authorization

In addition to the above, if the developer plans additional construction or expansion to the condo building, all of the documents required in the section above -- Requirements For Existing Buildings For Which The Developer Has Not Turned Over Control To The Condo Association -- are required, too.

Requirements for existing buildings with an active condo association

For condo buildings in which all common elements have been completed for at least one year, and for which a homeowners association is active and in control of the building, the steps to be an FHA-approved condo building are simpler than for less-finished builders.

To get an existing condo building with a viable condo association FHA-approved, the following information is required:

  1. A document describing the project
  2. A recorded project plat, map, and/or air lot survey which identifies condo units
  3. Condominium legal documents
  4. The project's annual budget, including income and expenses and sufficient reserves to meet current costs
  5. A report from the management company
  6. Minutes from the last two condo association meetings
  7. Certification from the association that the building meets 51% owner-occupancy requirements

Note that the FHA will not approve a condo building which is shown to have defects in construction; a deficient operating budget; or, for which there are "substantial disputes" or dissatisfaction among unit owners regarding the operation, maintenance, or management of the project.

Buildings with outstanding lawsuits are rarely approved by the FHA as FHA-approved condos.

Requirements for condo buildings already approved by the department of veterans affairs

Condo buildings already approved by the Department of Veterans Affairs for buyers using VA loans get fast-tracked through the FHA condo approval process.

To get an existing condo building which is VA-approved to be FHA-approved, the following information is required:

  1. The VA project approval letter (VA Letter 26-619), plus a brief description of the project
  2. Condominium legal documents
  3. Certification from the association that the building meets 51% owner-occupancy requirements

Pre-sale buildings must show a recorded plat; the proposed operating budget of the condo association; the developer's plan and schedule for development; and, an Affirmative Fair Housing Marketing Plan if the projects consist five or more units.

Existing condo buildings must submit the condo association's current financing statement and operating budget; and, the minutes from the last two meetings.

Buildings with a 10-year warranty at least will allow home buyers to make a 3.5% downpayment via an FHA-insured mortgage. For all others, FHA loan-to-value is limited to ninety percent.

Requirements for condo buildings already approved by fannie mae

Condo buildings already approved by Fannie Mae can get fast-tracked through the FHA condo approval process, too.

To get a existing condo building which is Fannie Mae-approved to be FHA-approved, the following information is required:

  1. Fannie Mae Form 1026, Application for Project Acceptance
  2. Fannie Mae Form 1027, Conditional Project Acceptance, if required
  3. Fannie Mae Form 1028, Final Project Acceptance

Again, buildings with a 10-year warranty at least will allow home buyers to make a 3.5% downpayment via an FHA-insured mortgage. For others, FHA loan-to-value is limited to ninety percent.

Verify your new rate (Nov 19th, 2017)

FHA approved condos: Rules and requirements

FHA guidelines are specific with respect to condominiums, and sometimes stringent. It's more difficult to get approved for a FHA loan on a condo than for a single-family home.

The number one reason why condos are more difficult for which to get approved than detached homes is because condos are more risky for the FHA to insure. If one condo unit in a building goes to foreclosure, as an example, the value of all units in that building can potentially decline.

As home values fall, the cost to insure against loss climbs, which weakens the FHA's business.

The FHA, therefore, imposes a number of restrictions on condos and required that all condos be FHA-approved in order to get home loan approval.

FHA pre-sale requirements for new construction condos

The FHA requires that 70% of the units in a new-construction building to be sold before it will consider the condos for FHA approval. In some cases, the pre-sale requirement will be lowered to 51%, if there's an active market for the building's units.

In order to prove that a unit has been "sold", the FHA will want to see executed sales agreements and evidence that a lender is willing to make the loan. This documentation is not always available to a buyer.

Therefore, in order to prove that pre-sale requirements have been met, letters from lenders which certify that these requirements have been met can be used as a substitute.

Note that the pre-sale requirement will apply to existing condo buildings where the developer is still marketing the building's units.

Verify your new rate (Nov 19th, 2017)

Owner-occupancy requirements for FHA-approved condos

The FHA requires that 65% of the units in a condo building be owner-occupied, or sold to owners who intend to occupy the units, in order for the condo building to be FHA-approved, provided it meets criteria described at the beginning of this article.

Note that lenders are permitted to issue mortgage approvals to FHA borrowers prior to a condo building meeting its 51% owner-occupied requirement. However, the FHA will not insure such a loan (i.e. the loan cannot close) until the owner-occupancy minimums are met.

FHA approved condo requirements for rental conversions

In general, rental conversions to condominiums are ineligible for FHA financing.

The exception to get the building FHA-approved is to meet the following three requirements:

  1. The conversion to condos must have occurred more than 12 months ago
  2. The borrower must have been a tenant in the building seeking FHA condo approval
  3. The property conversion is being sponsored by a bona fide tenants organization which represents the majority of the building's households.

Rental conversions must meet all other requirements for FHA-approved condos, too.

Verify your new rate (Nov 19th, 2017)

Construction completion requirements for FHA-approved condos

In order for a condo to be FHA-approved, the entire condominium project must be completed before any mortgage can be insured. This is because owners of a condominium own their individual unit, as well as an interest in the "common elements" of a building which may include lobbies, garages, hallways, and storage spaces.

Sometimes, though, condos are built in phases. If your condo building seeks FHA-approval and its construction is phase-by-phase, the FHA will require the following:

  1. A formal development plan from the building which includes the total number of units and all planned facilities for the community
  2. Evidence that each phase meets both pre-sale and owner-occupancy requirements
  3. A reasonable expectation that the developer will finish construction as planned.

If common areas are not completed as of the date of closing, the FHA will want the builder to escrow 150% of the expected construction costs; and will want the builder to pay its proportional share of the cost of common areas for units which remain unsold or not-yet-conveyed to a buyer.

What are today's mortgage rates?

Buying an FHA-approved condo requires home buyers to meet additional loan standards not required for purchasing a detached, single-family home. Qualified condo buildings, however, get access to the same great FHA mortgage rates as with all FHA-insured loans.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your new rate (Nov 19th, 2017)

Gina Pogol

The Mortgage Reports Contributor

Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2017 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)