Curve

FHA to allow ‘spot approvals’ — a practice it banned almost 10 years ago

Peter Miller
The Mortgage Reports contributor

FHA to bring back a guideline banned in 2010

FHA condo mortgage financing has long been complex and hard to get. The current rules are so restrictive that more than 90% of the nation’s 150,000 condo projects do not qualify for FHA-backed mortgages.

But now HUD is simplifying FHA condo mortgage rules.

In October 2019, FHA will again allow “spot approvals” — the practice of approving for FHA financing single units within unapproved condo complexes.

That guideline was erased from FHA rulebooks almost a decade ago.

Ready to finally buy a condo with an FHA loan? Now could be the time.

Check your FHA condo buying eligibility. (Sep 16th, 2019)

Likely benefits of new rules

The new standards will make FHA condo financing cheaper and more available. HUD estimates that units in an additional 20,000 to 60,000 projects will be eligible for FHA loans once the rules change on October 15th, 2019. We might see other results as well.

  • There will be more inventory available for sale with FHA financing. That’s financing which generally requires just 3.5% down.
  • We’re likely to see firmer condo prices as more buyers come into the marketplace.
  • The new standard essentially brings back the concept of “spot approvals” for FHA condo loans.

How condos are different than single-family homes

Condos may look like homes, townhouses, and apartments but they’re actually different. A home on a plot of land is generally “fee-simple” real estate. You own the house and the land. You can decide such issues as what color to paint the place, how it should be financed, whether or not to rent, and how it should be financed.

With condominiums, you own a unit and have the right to use common areas. You pay fees to the condominium association, generally known as a homeowners association (HOA). Condo associations own the common areas and typically takes care of external maintenance. They also have rules.

An HOA may limit or ban unit rentals. It can decide what exterior colors and materials are allowed. The homeowners association can decide how much is necessary for reserves and special assessments. It can foreclose on your property if HOA fees are not paid. It can be foreclosed if it does not pay mortgage loans on common property or property taxes in general.

Pre-October 15 FHA condo mortgage rules

HUD wants to make sure HOA issues will not drag down condo values, especially the value of units financed with FHA-insured mortgages. As a result, HUD now has 95 pages of condo requirements.

  • No more than 10 percent of the units may be owned by one investor or entity, including the developer. There’s an exception for nonprofit ownership.
  • Many financial documents must be reviewed before the project is FHA certified. This can include the budget, bank statements, and current balance sheet.
  • Substantial reserves must be maintained. Funds must be on hand for repairs expected during the next five years.
  • Dues must be current. Not just for the unit being financed, but the majority of HOA members. “No more than 15 percent of the total units can be in arrears,” says HUD.

Someone has to review and certify HOA docs, budgets and records before a condo property can be FHA approved. That review can cost big money. Also, under the current rules, condo projects must be re-certified every two years. That’s more money.

Not surprisingly, condo mortgages represent just 2% of all FHA loan volume.

Post-October 15 FHA condo mortgage rules

Starting October 15th things will be different.

“The FHA,” said HUD, “will insure mortgages for selected condominium units in projects that are not currently approved.”

In other words, FHA will allow you to buy an individual unit within an unapproved condo complex. These used to be called “spot approvals,” but that allowance was ended in 2010. It appears that “spot approvals” are back.

New FHA financing will be available for tens of thousands of additional condo projects. More and easier financing should be good for condo prices and ease the burden for both condo buyers and sellers.

Get started on your FHA condo buying approval. (Sep 16th, 2019)

Single-unit requirements

For condominium projects with 10 or more units, no more than 10% of individual condo units can be FHA-insured. Projects with fewer than 10 units may have no more than two FHA-insured units.

Investor limitations

The program won’t work with a project where half the units are not owner-occupied.

FHA concentration

Not more than 50% of the units in an approved project can be financing with FHA-insured mortgages.

Commercial limitations

The commercial/non-residential space within an approved condominium project not exceed 35% of the project’s total floor area. Fannie Mae and Freddie Mac also have a 35% standard. The old FHA limit was 25%.

Recertification

The new rules extend the recertification requirement for approved condominium projects from two to three years.

How to benefit from FHA condo mortgage changes

The new rules are likely to result in additional condo sales. With more demand, there will be more pressure to generally raise condo prices. Especially in metro cores with large concentrations of condo projects, the new HUD rule should be good both for buyers and sellers.

For details and specifics speak with mortgage lenders who offer FHA financing.

Apply for an FHA condo loan

Now is a great time to apply for an FHA loan so that you are approved when the new rules go into effect.

There’s likely to be a flurry of FHA condo buyers come mid-October. Get ahead of the crowd and get your pre-approval now.

Verify your new rate (Sep 16th, 2019)