On Wednesday, the Department of Housing and Urban Development (HUD) updated the new condominium financing rules for FHA loans. Lenders will be able to issue FHA loans for single condo units, and buildings with a greater number of investor-owned units or greater percentage of commercial space. The new rules, which will go into effect Oct. 15, will give a boost to the condo market.
The new condo rules, which will help more would-be buyers access affordable housing. Specifically, the new rules will:
FHA approvals for condos prior to these changes have been heavily restricted. Before these new rules, an entire building would need to be approved for an FHA loan to be approved. Getting a building approved was a lengthy process and most buyers, if they were going to use an FHA loan, would not wait around for the approval. FHA mortgage loans are mortgages that are guaranteed by the U.S. Government’s Federal Housing Administration. FHA loans are attractive to some buyers because they can put down as little as 3.5% and they can have a lower credit score, in the 600’s, to qualify.
The downside is the borrower has to pay FHA mortgage insurance, which is similar to Private Mortgage Insurance (PMI) on conventional loans. FHA mortgage insurance is paid as a small one-time payment at closing and as a small monthly payment.
FHA restricted its condo approval process in 2009, which limited the number of properties that could receive FHA loans. In 2016, it moved to lift several of those restrictions, but the proposed rules were never finalized.