The Federal Housing Administration (FHA) condo loan guidelines were updated recently. So if you’re looking to buy or sell a condo soon, make sure you know about these changes.
What’s an FHA condo loan?
When you buy a condo, you own your specific unit and an undivided interest in some pretty neat community elements, such as a pool, jacuzzi or gym.
It’s typically cheaper to buy a condo than a home, but you’ll still also have homeowners association fees, which take care of landscaping and maintenance of shared areas. The median price for single-family homes is $248,000 compared to $234,000 for condos. What up, savings!
A FHA condo loan is exactly what it sounds like: A financing option for condos from the FHA. What’s so special about it? With an FHA condo loan, your down payment can be as low as 3.5% of the purchase price. That’s a deal. 👏
What changed and why should I care?
Four parts of the FHA condo loans changed to make the process easier. The updates are:
- Some projects no longer need approval by the Housing and Urban Development
- Faster financing for projects on the FHA list
- Single-unit approval
- Faster HUD approval
Let’s take a closer look at all four of these changes.
Some projects don’t need approval
FHA condo loan guidelines now include a few other types of properties that do not need an approval by HUD for the whole project upfront. These properties include:
- Real estate owned (REO) properties
- Streamline refinance for condos
- Detached projects where land does and does come with the project
- Townhomes where land conveys (meaning that ownership of the land will be transferred)
This change also extends the expiration date for approved condo financing, up to three years from two. Meaning, approved condos stay approved for an extra year. Buyers are less likely to have to wait on HUD approval when trying to buy their condo. That’s great news!
Projects already on the FHA list
The update about projects already on the FHA list comes with some good news and not-so-bad news. 😬
Projects that are already on the FHA’s approved list, are not automatically approved for financing. There are a few more hurdles to clear first. The condo team working on getting it approved for financing may have to fill out a five-page questionnaire and you may have additional costs through your lender, which could cause delays. However, if the FHA isn’t happy about the answers on said questionnaire, it could just make the project ineligible for financing instead (yikes).
Also, the FHA has now eliminated the second home occupancy option, which is when the buyer plans to use the condo as a vacation home, live in it for less than half of the year and not rent it out. This means condo loans can only be taken by those who plan to live in the condo or who are buying a condo to use as an investment.
You can still get approval even if investors purchase up to 65% of the condos in a building. So for those of you who want to purchase a condo in an area that’s popular for vacation-goers or renters: You’re welcome! Another happy note? While there is no longer a second home occupancy option here, owner-occupied condos can be rented out for less than half the year. Don’t be afraid to AirBnB it out for a few months of the year, folks.
This brings us to single-unit approval: the change most agents and lenders are excited about (and probably also the most confused).
According to HUD, this update will “introduce a new single-unit approval process to make it easier for individual condominium units to be eligible for FHA-insured financing.” However, this change does not bring back “spot approvals.” There are specific guidelines around the approval process that are important to note.
For starters, the single unit has to be in a project that is not already approved as a whole project. If the project has more than 10 units, less than 10% of its condos should be financed through FHA. If it has less than 10 units, then only two of them can be backed by FHA.
Submissions for project approval by HUD
Overall, single-unit approval will require the same documentation package as a whole condo project would. However, a big plus with this update is that lenders can now approve that documentation package to make sure the project (or single-unit) is approved for financing in-house within 48 to 72 hours if everything checks out. Previously, it could take as long as four to six weeks. If everything is in order, this could make for a much quicker and easier process to get into your new condo. Though, be aware, extenuating circumstances or paperwork could cause delays.
Like anything else, these condo loan changes have pros and cons. While there may be a little more red tape on some parts, these new rules are meant to offer financing to more people looking to own condos.
If you’re still a little fuzzy on how this update could help you attain FHA financing for a condo, contact a local loan officer.