Buying a Condo Just Got Easier

Have you ever considered buying a condo and explored your loan options? If so, you may have first-hand experience with the restrictions on Federal Housing Administration (FHA) loans for condos. These loans are particularly appealing to first-time buyers because they require a 3.5 percent down payment and have loose credit requirements than conventional loans. Unfortunately, FHA loan restrictions have prevented many people from buying a condo.

Frustrating Restrictions

FHA loans and condos appear to be a great combination for many buyers, especially first-time buyers, yet only 6.5 percent of condo projects in the country are approved for FHA financing. In order to be approved for FHA home loans, condo projects have to be on FHA’s list of approved condominium projects published on the FHA website. This list can be used by consumers to search for approved condo projects by condominium name, state, zip code and other details.

As stated on the FHA/HUD website:

“FHA insures condominium single unit loans for up to 30-year terms to purchase or refinance a unit in an FHA-approved condominium project. The condominium project must be primarily residential, contain at least two dwelling units and can be detached, semi-detached, a row house, a walk-up, mid-rise, high-rise, including those with or without an elevator, or manufactured housing.”

There are even more restrictions based on how much floor area is taken by non-residential use. The impact of FHA loan restrictions is staggering when you look at the numbers. In the past year, only 17,792 FHA condo loans have been originated even though there are more than 8.7 million condo units nationwide. Nationwide, inventory shortages have been holding back home sales growth, yet June condo and co-op sales this year declined 6.5% from the same time last year according to NAR’s most recent existing-home sales report. It would obviously make sense to somehow make condominiums easier to obtain.

Finally a Break

On August 14th, the Department of Housing and Urban Development released new approval guidelines which the National Association of Realtors has been championing for over a decade. The new rules for FHA financing will go into effect October 15 2019, making buying a condo a lot easier for many people.

“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families and it’s critical that FHA be there to help them,” U.S. Housing and Urban Development Secretary Ben Carson said in a statement. “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.”

“We are thrilled that Secretary Carson has taken this much-needed step to put the American Dream within reach for thousands of additional families,” said NAR President John Smaby. “It goes without saying that condominiums are often the most affordable option for first-time homebuyers, small families and those in urban areas. This ruling, which culminates years of collaboration between HUD and NAR, will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people.”

One of the biggest changes will allow the approval of individual condo units. Previously, a person who wanted to purchase a condo using an FHA loan had to choose a unit that was located within a previously approved condominium project.

Here are some selected highlights of the new changes:

• This policy change introduces a new “single-unit approval process” for certain condos in the United States.
• The new guidelines will make it easier for individual condominium units to qualify for FHA-backed mortgage financing.
• If the non-approved condominium project has 10 or more units, up to 10% of them can be FHA-insured. (To extend eligibility beyond that 10% limit, the entire project would probably have to be approved.)
• Non-approved projects with fewer than 10 units can only have up to two FHA-insured units.
• The new policy will also lengthen the recertification requirement for approved condo projects from two to three years.
• Additionally, these changes will relax the eligibility requirements for some “mixed-use” developments (that offer both residential and commercial space).