New FHA Condo Rules Will Open More Doors for Buyers
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:
- Extend FHA certifications on condo developments from two years to three years, with an additional six-month grace period to meet requirements. This will alleviate some of the cost and time burdens on condominium associations that intend to maintain FHA approval. Condo associations also may continue submitting updated recertification packages, rather than the full certification package each time. The National Association of REALTORS® expects the change to prompt more condominium properties to apply for FHA eligibility, making more affordable housing more accessible.
- Allow for single-unit mortgage approvals—often known as spot approvals—that will enable FHA insurance of individual condo units, even if the entire property does not have FHA approval. The condo building in which the FHA buyer wants to purchase must meet certain requirements: The property must have at least five units, a limited concentration of FHA-insured units, at least 50% owner-occupancy, and a maximum of 35% commercial space.
- Secure additional flexibility in the ratio of investors to owner-occupants allowed for FHA financing in a condo building. While the current owner-occupancy requirement is 50%, HUD may approve an owner-occupancy level as low as 35% for older properties with less than 10% of units in arrears. Individual investors can purchase no more than 10% of units in a property with more than 20 units and no more than one unit in properties with less than 20 units.
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.
