FHA Backed Loan – The nuances of condo mortgage financing can be challenging. The established regulations are difficult to navigate and in most cases, condo projects don’t qualify for these mortgages.
However, this is all about to change with the easing of condo mortgage rules.
FHA has started allowing spot approvals, which means FHA can help finance single units even if the condo complex isn’t approved as a whole.
This used to be the way things were done until sometime in 2010 when the rules were changed.
For those ready to jump in with an FHA loan, it’s best to apply right now. Take a look at what is needed to be eligible for an FHA Backed loan.
Advantages of the New FHA Regulations
What is going to happen with these new FHA regulations? In general, the brand-new standards are going to make it easier to get your hands on FHA condo financing. Studies show there is going to be an uptick in how many units are financed with the number sitting between 20,000-60,000 units. This will happen as soon as the FHA loans and their rules are settled into place.
This is just a part of what happens as soon as the FHA financing rules are set into motion. Since there are more units up for sale through FHA financing, this means the down payment is going to be set at 3.5%.
This will help in keeping the condo prices set at the same level to encourage new buyers as they look for a condo.
The standard is all about making the most of “spot approvals” that come with the FHA rule changes.
Condos Compare To Single-Family Homes
Condos are a little bit different from other options available on the open market such as townhouses, homes, and other apartments. A home is deemed to be any plot of land that is set with a “fee-simple” standard. This means you can tweak certain elements of the property such as how it is painted, how it is financed, and even whether or not you’re going to rent it out to someone else.
Condos don’t fall into this setup because you don’t own the rights to the common areas. Instead, you are allowed to use them as a condo owner but you only own the actual unit. The fees paid to the condo association or the homeowners association (HOA) will be responsible for the common areas and are the ones taking care of them as well. These common areas tend to come with their own rules.
The HOA can do as it pleases when it comes to whether or not unit rentals are permissible. They can even take the time to determine what type of colors are used for the condo complex. The HOA has additional rights such as being able to make special assessments, foreclose specific properties when fees aren’t paid and even foreclose properties when the loan/property taxes aren’t paid.
FHA Condo Mortgage Rules Before Oct 15th
FHA-insured mortgages are dependent upon the unit’s value before the financing goes through. This is why HUD aims to make sure HOA problems don’t cause trouble. This is why the HUD is now equipped with over 95 pages of specialized requirements for condos.
Before Oct 15th, These rules included the 10% standard, where a single investor/entity can’t own over 10% of the units in a condo complex unless they are a trusted nonprofit organization.
All financial documents associated with the condo complex need to be certified by the FHA. This includes statements from the bank, budget details, and current balance sheets.
For the condo complex to be legitimized, it needs to have up to 5 years’ worth of funding in the bank for repairs.
All dues must be up-to-date, which means not just the condo unit but also from the HOA members too. Anything past 15% in arrears isn’t allowed for the entire condo complex.
Along with all of these rules, a certified specialist is expected to go through the relevant documentation to see whether or not it is in line with FHA standards. This alone can become a costly exercise for condo projects because they require re-certification from time to time.
Due to these rules, condo mortgages didn’t go through FHA-backed setups.
FHA Condo Rules After Oct 15
It all changes after Oct 15th.
The FHA has taken the time to make sure certain condo units aren’t restricted from seeking an FHA-backed loan.
This means anyone willing to purchase a condo unit in an uncertified or unapproved condo complex can do so as a “spot approval.” While this wasn’t allowed in the past, it is now.
FHA financing is going to make it easier for tens of thousands of projects. The financing option is going to make it easier to find a good condo price and make it a better market for everyone involved.
If a condo project is offering more than 10 units, they cannot have over 10% of these units FHA-insured. Anything less than 10 units can only have 2 FHA-insured units in the project.
Limitations for Investors
The FHA program is only for those where most of the units are owner-occupied.
FHA isn’t going to want more than 50% of the units to go through FHA-insured financing.
There are also commercial-based limitations because only 35% of the complex can be used for commercial purposes. Anything more and it isn’t compatible with FHA regulations. In the past, this number was set at 25%.
Additional rules have been set up to increase the re-certification timeline from 2 years to 3 years.
Taking Advantage of the FHA Condo Mortgage Changes
These rule changes are great for those looking to purchase a new condo. The demand is going to rise and is going to drive the prices down. This is ideal in metro areas where there are loads of condo projects launching at the same time. These rules should help everyone involved.
To learn more, take the opportunity to reach out to a mortgage lender offering FHA financing.