Earlier this month (October of 2019), new rules for financing condos through the FHA went into effect. These rules have made it easier to finance an affordable, convenient condo units, and it’s creating new opportunities for a variety of buyers.
In the past, condo units were approved based on the entire building. Essentially, if a whole group of condos had a flaw (as deemed by the FHA), the entire building was ineligible for FHA financing. This eliminated many individual units that were otherwise perfectly fine.
The new rules, however, allow lenders and lending agents to look at condo units on an individual basis.
According to a press release by the Department of Housing and Urban Development (HUD), which oversees the FHA, this change is intended to “promote affordable and sustainable homeownership, especially among credit-worthy first-time buyers,” and it will be a “flexible and responsive” way for borrowers to secure financing for a condo.
This change will create a massive revision to how the FHA approves condos, and how lenders and borrowers can complete the process of securing a mortgage.
Specifically, the new policy will allow individual condos to be eligible for financing, even if the condominium project itself is not eligible.
New Rules Part of an Overall Effort to Reduce Barriers to Affordable Housing
Under the leadership of HUD secretary Dr. Ben Carson, the FHA is expanding their efforts to offer reliable financing options to more American homebuyers, especially those who are seeking reasonable, affordable housing. With the new rule, the FHA has introduced a new single-unit approval process, which makes it easier to purchase a condo unit. The FHA has also extended recertification requirements for approved condominiums; instead of having to re-certify every two years, recertification is now required every three years.
Mixed-use projects are now available for financing as well. These are buildings that provide more than one purpose; most commonly this means a facility that provides residential living space along with commercial space for retail or commercial purposes.
Carson stated in the press release that condos have become more popular has a housing option for many homebuyers, including families. Therefore, “it’s critical that FHA be there to help them,” and “open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age-in-place.”
In many ways, the FHA is responding to what the market is telling them while meeting its purpose of providing support for eligible borrowers. According to the FHA’s statistics, 84% of all condo buyers have never owned a property in the past, but only 6.5% of all condo projects are eligible for FHA loans. The new policy could make as many as 60,000 individual condo units eligible for financing, even if the project as a whole does not technically meet the approval of the FHA.
Requirements for Single-Unit Approval
Suppose you are looking to purchase a condo unit and would prefer an FHA loan. You have found the perfect condo for your needs; it has the top amenities, a wonderful view, and (best of all) it’s in the perfect neighborhood.
But, for what ever reason, the condo project is ineligible. (Condo ineligibility can come from many factors, including the financial and legal status of the HOA.) Previously, you would be out of luck; you’d either have to use a different form of financing or look for a different condo.
Now you have a new option.
With the new rules, the lending agent can take a fresh look at the condo and see if it is eligible for individual-unit approval.
One of the main requirements for using this new rule is that if the project has ten or more units, only 10% or less of the project can be purchased using FHA loans. So if there are 50 condo units in the building, only five can be financed through the FHA. If there are fewer than ten, the maximum allowable number is two. Basically, this is a way for the FHA to reduce risk, as they don’t want to be over-invested in a single condo facility.
There are also rules for owner-occupancy. Many condo units are rented or used for other purposes. (Assuming this is allowed by the HOA.) But the FHA requires that at least 50% of the units are occupied by the owners.
The FHA has stipulated that the unit cannot be in a project identified by HUD as having significant issues that impact the quality or “viability” of the project. It cannot be a manufactured home, and it must be in a project that has at least five units. If there are only four, it won’t be eligible.
How it Will Work
To complete a transaction using this new rule from the FHA, you and your lending agent will need to follow a few specific steps. The agent will need to follow a standard process for requesting a case number and complete a few forms. They will also send required information to ensure the case is processed swiftly.
Once approved, your lending agent will further submit various information, including data on the condo and the condo facility.
Benefits of this Change to Condo-Unit Financing
There are lots of details, but overall these new changes will bring significant benefits to homebuyers who want an affordable and convenient condo.
Numerous groups, such as the National Association of Realtors, have applauded the change. They say that the new rules will help more potential buyers purchase affordable housing that fits the homeowner’s specific needs. Both for lifestyle and for finances, condos are increasingly popular, especially among first-time buyers who often need a place that is low-cost and convenient. Although anyone, at any stage of life, can utilize condos, they are especially popular for retirees and empty-nesters as well as first-time buyers.
The Right Support for Your Condo Purchase
If you are interested in purchasing a condo unit with an FHA loan, contact our staff today. We’ll help you understand the benefits of each and every financing option so you can make a fully-informed decision.
“We’re loving our new place and we’re very pleased with how smoothly everything went through closing. Thanks for keeping us up to date on the possibility of refinancing at a lower rate; we trust your judgement as far as waiting until the rate is around 5% lower before we refinance. We’re very interested in pursuing that if rates drop to that level. Thanks so much for all your help and personal attention!”
When looking for a house, we had couple recommendations for a lender. After talking with all the lenders, many were difficult to work with and couldn’t get it done as quickly as we needed. I was referred to Chad Baker’s team and I am glad we did. Not only did they get the things done quickly for us, they were very easily to get ahold of. It wasn’t rare to get a response within 15 minutes whenever an email was sent. I could not express how friendly and outgoing this team is. And on top of that, they came back with the best offer for us amongst all the other brokers. I am glad I worked with these guys. If you are looking for a lender…MAKE SURE TO CALL CHAD BAKER AND TEAM!!! Thanks Chad for all your hard work. Next time we buy another house I am calling you first!
I was amazed how quickly Chad was able to knocked out our refinance!. I highly recommend Chad he & his team did an incredible job! I had 3 others I was working with, including a Credit Union. Chad was able to offer me a lower rate with no fees! Based on the other 3 top financial bids I had for this refinance. ”