Financing for condos can be hard to secure. These properties are inherently different; as such the financing is different too. In the past, FHA loans for condos were hard to come by, but with some basic changes, these loans are now more accessible, making condos more accessible as well.
If you are considering a condo for your property purchase, you should understand the usefulness these recent changes.
FHA Loans for Condos: Exciting Changes, New Opportunities!
Condos are treated differently in the real estate and mortgage industry. They are not like single-family homes, where the owner has sole possession of the house and the property it occupies. But neither are they like apartments, where a single person or company owns the entire property and occupants pay for the opportunity to live there.
Condos are structured differently. Individuals own a single condo unit, but also make payments to the homeowner’s association (HOA) and have access to common areas, such as laundry facilities, workout areas, pools, and other amenities. Condo owners don’t have nearly as much choice when it comes to using the property. They can’t paint and decorate the exterior or remodel the property as they see fit; virtually all changes need to be overseen and approved by the HOA.
Mortgage financing for condos is different as well. While each organization has their own rules for mortgage lending, the FHA generally requires that an entire condo facility, not just the individual units, be approved for mortgage lending. If the building is not approved, the prime units and the less desirable units are both ineligible.
FHA financing for condos has been difficult to gain in the past. Through a set of complex rules and regulations, roughly 90% of the nation’s condo units were ineligible for financing. But in the recent past (roughly 2019), the FHA simplified their rules so that more people could qualify for financing on condos.
Spot approvals are simply financing for loans on individual condo units that are in a facility that is unapproved for financing.
The Old Rules: A Brief Review
Previously, the Department of Housing and Urban Development (HUD), which oversees the FHA, had roughly 95 pages of rules and requirements for using FHA financing. The more rules there are, inevitably, the more restricted the financing becomes. By eliminating and simplifying many of the rules, the chances of FHA approval on a condo loan are increased.
First, let’s gain some perspective by looking at the old rules. Under the old system, no more than 10% of the units in a facility could be owned by one investor or investing company, although there was an exception for non-profit ownership. Also, the financial documents for the condo building, including budget, bank statements, and balance sheets, had to be reviewed and approved by the FHA. The facility had to have strong cash reserves, and dues must be current not only for the individual unit being purchased, but for the facility as a whole.
All of these requirements created complexities. Someone had to review and certify all of this information, and paying for this review, which required a trained professional, could be costly. Recertification is also required, which means more money. For these reasons, condo loans only represented roughly 2% of all FHA loans.
The New Rules: “Spot Approval” for FHA Condo Loans
Under the new rules, things are slightly different.
Now, instead of just looking at the facility, the FHA can approve mortgages for specific condo units in facilities that are not approved. This means that the FHA will allow you to purchase a condo unit in an unapproved complex. This is what’s known as a “spot approval,” a practice that was essentially banned in 2010 but has now returned.
By allowing lending agents to underwrite FHA loans on individual units and not just an entire facility, tens of thousands of condos will become available for financing.
The Result of These Changes
These new changes are likely to bring a variety of positive results. For one, more condo units will be available for financing. At the time of these changes, the FHA estimated that anywhere from 20,000 to 60,000 units would be available for lending. It’s hard to say how many units will be available in individual cities across the country, but it seems likely that towns with lots of condo space, such as San Diego, will experience renewed interest in owning these types of properties.
From a buyer’s perspective, there are clear advantages. But from a seller’s perspective, there are advantages as well. When more people are able to secure financing, it means there are more potential buyers, so sellers may see more competition and renewed interest in their condos. FHA financing generally has lower requirements, such as downpayments as low as 3.5% for some buyers. This increases the amount of potential buyers, which is a good thing for current condo owners.
Condos Provide a Useful Housing Option in Today’s Market
In the current real estate market, where homes are selling fast, buyers are struggling to find the right home, and inventory is extremely low, purchasing a condo could be the right option. By making FHA loans for condos more accessible, the FHA may have helped reduce the inventory problem without even realizing it.
Many people are finding that purchasing a home is extremely difficult. They only have so much time to look at a house, consider an offer, make the offer, and wait for a reply. Homes are purchased quickly and often sell for well above the asking price. For this reason, you might consider a condo purchase instead, and, thanks to spot approval, you may be able to finalize the purchase while taking advantage of a top-quality FHA mortgage.
FHA Loans for Condos are Available Now
If you want to purchase a condo in San Diego or the surrounding area, contact our staff today. We’ll help you find the right loan to fit your specific needs, so whether you want to buy your first property or want a beach-side vacation condo, we can help make it a reality!