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New FHA Guidelines Make It Easier To Get Financing To Purchase A Condo

Author: Judyann M. Lee Date: 09/22/2019

Categories: Real Estate Law

Image of a person filling out an FHA Loan Federal Housing Administration Lending

The Federal Housing Administration (“FHA”) released new guidelines for its project approval process for condominiums, which will go into effect on October 15, 2019.  These new guidelines are meant to streamline the process and make it easier for certain credit-worthy homebuyers to obtain FHA financing.

Currently, for a homebuyer to be eligible for an FHA-insured loan to purchase a condominium unit, the entire condominium project must be on FHA’s Condominium Approval List, and the condominium must re-certify every two years to maintain its approval.  The eligibility requirements are not easily met for many condominiums, and as a result, a lot of prospective homebuyers cannot obtain FHA financing to purchase units in those condominiums.

There are more than 150,000 condominium projects within the country, but only about 6.5% of them are on FHA’s Condominium Approval List. FHA is the largest mortgage insurer in the country, so a homebuyer’s inability to obtain FHA financing can be the deciding factor on whether or not a homebuyer will be able to afford the purchase of a condominium unit.  FHA’s approval process has eliminated a lot of affordable housing options, which is contrary to FHA’s mission to contribute to building and preserving healthy neighborhoods and communities and to maintain and expand homeownership. 

In response to market conditions and to be more flexible, FHA has changed some of its requirements.  One major change is that the new guidelines will allow certain individual condominium units to qualify for FHA financing, even if the condominium project is not on the Condominium Approval List. If a condominium that is not on the Approval List contains ten or more units, then up to 10% of them may be FHA financed. If it has fewer than ten units then up to two units may be FHA financed.

The new guidelines also extend the length of time before an approved condominium project has to recertify from two years to three years and such a condominium will only be required to update new information instead of resubmitting all project information.  FHA has also relaxed some of the eligibility requirements. These include allowing more mixed-use projects (those that contain both residential and commercial uses) to qualify for FHA-approval. The current guidelines restrict commercial use to no more than 25% of a condominium’s square footage; the new guidelines increase it to 35%. The new guidelines also lower the current owner-occupancy requirements from at least 50% owner-occupied units to as low as 35% owner occupancy if the condominium is financially and operationally stable.  

There are other changes to the guidelines in addition to the ones summarized above.  According to the Housing and Urban Development (“HUD”) Secretary, Ben Carson, these changes to the guidelines could be especially helpful for first-time homebuyers, which make up 84% of FHA financed condominium purchases.  Buyers who had to rely on conventional loans to purchase a condominium may now be able to use FHA financing for their purchases. It is also expected that the new guidelines will qualify an additional 20,000 to 60,000 condominium units for FHA financing annually.  The new guidelines will be included in the “Single-Family Housing Policy Handbook,” which will be available on HUD’s website starting October 15, 2019.

Judyann is an attorney in the firm’s real estate group and assists condominiums with obtaining FHA Condominium Approval and re-certifications.  You may contact her at jlee@mcmillanmetro.com for more information.