FHA Issues New Rules Regarding Condominium Approvals
Many of you are aware that the Federal Housing Administration (FHA) insures financing to owners for their purchase of a home. These homes include condominiums in condominium associations. FHA loans are great for new home buyers, or those who cannot afford a large down payment, as they typically require a lower down payment. In regard to condominiums, the entire condominium association / building has to be approved by the FHA in order for applicants to qualify for an FHA insured loan.
Some condominium associations go through the exhaustive FHA approval process, some choose not to do so. Some associations want to be FHA approved to facilitate sales; some associations do not want to be FHA approved because they do not like the low down payments and low initial owner equity in the units. If an association is not FHA approved, the FHA will not insure financing in that community. If a prospective purchaser wanted to move into a non-FHA approved building utilizing an FHA insured loan, they could not do so, and had no options, other than securing other than FHA insured financing, to buy in that building.
In an effort to promote affordable and sustainable homeownership, the FHA recently published a new final regulation and policy implementation guidance, establishing a new single unit condominium approval process.
Previously, if you wanted to purchase a condo using an FHA loan, you had to choose a unit that was located within a previously approved condominium project. The entire building had to be FHA approved before a person could buy an individual unit with an FHA-insured mortgage loan.
The new FHA rule introduces a new single-unit approval process to make it easier for individual condominium units to be eligible for FHA insured financing. The new rule also extends the recertification requirement for approved condominium projects from two to three years, and allows more mixed-use projects to be eligible for FHA insurance.
The new rules create a pathway for an individual owner to get an association FHA qualified. This owner initiated pathway did not exist before, as only the association itself could apply for, and become, FHA qualified. The new FHA rules do not affect any possible restrictions in an association’s governing documents, and there is nothing in the new rule to imply that an Association must accept an FHA loan (although an association should certainly to check with its attorney if contemplating not to do so).
According to HUD Secretary Ben Carson, these FHA rule changes could be especially helpful for younger first-time buyers, as well as some seniors:
“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families … Today, we take an important step to open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age-in-place.”
According to the press release, as of October 15, 2019, individual units in a non-FHA approved association may be eligible for Single-Unit Approval if the individual condominium unit is located in a completed project that is not FHA approved and, for condominium projects with 10 or more units, not more than 10 percent of individual condo units can be FHA-insured; and projects with fewer than 10 units may have no more than two FHA-insured units.
While this new rule opens up a pathway for an individual to qualify a community, the process is almost as complicated as the association qualifying, which may make it challenging for an individual owner to process such an application.
The HUD press release goes on to state
“The vast majority (84 percent) of FHA-insured condo buyers have never owned a home before. While there are more than 150,000 condominium projects in the U.S., only 6.5 percent are approved to participate in FHA’s mortgage insurance programs. As a result of FHA’s new policy, it is estimated that 20,000 to 60,000 condominium units could become eligible for FHA-insured financing annually.”
Both associations and potential buyers need to be aware of these changes in the FHA approval process.
The HUD press release can be found at https://www.hud.gov/press/press_releases_media_advisories/HUD_No_19_121, last viewed 1:12 pm on August 20, 2019.
Howard J. Perl, Esq.
Fort Lauderdale | bio