New FHA Condo Rule Poised to Turn FHA Financing on its Head

Less than 10,000 condo projects out of the estimated 150,000-160,000 such projects across the country are approved for FHA financing. In the light of this stat, any guideline that opens up 20,000 to 60,000 condo units for FHA financing each year is a guideline worth getting ecstatic about. Precisely why the FHA’s longed-for condominium rules update (the Final Rule)- coming into effect on 15^th October 2019- is happy tidings. Now certain specific individual condominium units can benefit from FHA financing (through spot approval) even if the condominium complexes or buildings in which the proposed unit is situated is not itself approved by the FHA (more on it shortly).

Suddenly a lot more condo units open up for the first home buyers/downsizers/city lovers

Digging a little deeper, only about 6.5% of American condos had mortgage insurance attached to them. In absence of this insurance, FHA mortgage could not be meted out- the reason why only about 10,000 condos have been approved for FHA lending. When this number, 10,000, shoots up as high as 60,000, imagine the number of first-home buyers/downsizers/city lovers that are likely to see it as a big launching pad for their dreams- and visualize the resulting euphoria (a factor that guides the consumer sentiment for a nation)!

It is a pet peeve among condo-seekers that they have to spend a good deal more on a detached home in absence of an opportunity to buy a condo, thus ending up paying more for an item that they like less. Double whammy!

HUD and NAR echo the sentiment

It is no news that people look towards condos to fulfill their dreams of homeownership and the FHA condo announcement makes it more feasible for deserving entrants to get their pie of this great American dream; a sentiment echoed by the Department of Housing and Urban Development Secretary Ben Carson in his statement, “will open many doors to buyers who have been waiting on the sidelines, waiting to become homeowners, waiting to share in the American Dream”.

The National Association of Realtors (NAR) are elated just as well on seeing their decade-long effort towards seeking affordable housing for deserving homebuyers reach a stage of fruition. President John Smaby said, “It goes without saying that condominiums are often the most affordable option for first-time homebuyers, small families and those in urban areas,” He furthered, “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.”

It isn’t even worth a debate that single-family homes could benefit from much better mortgage deals from the Federal Housing Administration compared to those looking for condominiums. This status quo changed on 15th October.  Those buyers hunting for condominiums and looking (in futility) for FHA loans so that they have to fork out as less as 3.5% in upfront payment have now got a megawatt smile on their faces.

What are the revised guidelines?

Under the revised guidelines, for all the buildings with 10 units and more, an individual unit is going to be considered for spot approval if 10% or fewer units in the building are FHA-insured. Buildings that have fewer than 10 units also fall within the arc of new rules provided that 2 units or fewer have FHA-insurance. Of course, all this only comes through if there is a maximum of 35% commercial space and a minimum of 50% owner-occupancy in the proposed building or complex.

But even these apparent thumb-rules come with release points. For instance, though 50% owner-occupancy is a criterion, HUD is allowing 35% owner-occupancy if the financial reserve of the building (or complex) in question is healthy. The building reserve has to be a minimum of 10%. And of course, the building needs to be a year old at least.

The bounty does not end here.

The significant question of commercial space

Let us visit the crux question of commercial space. Buildings with more than 25% of commercial space weren’t considered for FHA loans prior to 15th October. Now, the figure is 35%. And moreover, your parking space was to be considered commercial space prior to 15^th October. Now, it is to be treated as a residential space if the parking is allocated to an owner-occupant residing in the building. Imagine the advantage. Say, before 15^th October, if your condo project had 10% parking space allotted to the residents, it could then have only 15% more commercial space (a maximum of 25%, remember?) to be considered for FHA financing. Now, under the new rule, that 10% parking space won’t be counted against your commercial space and in addition, you have an additional 10% (the limit having been increased from 25% to 35%) commercial space allowed. So benefit from both sides!

The only possible negative is that you may inadvertently be looking at a condo project that has already got its share of spot approvals and hence does not qualify anymore. So it is important to look at HUD’s website and seek information in depth.

Recertification period increased (and it is a great relief!)

It is worth recalling that since 2011, FHA has felt it necessary that each condo project be certified every 2 years- and this, even in those cases where the condo project had been certified before 2011. This recertification period has been increased to 3 years. Also, now, the condo owners don’t need to go through onerous protocols of application submission each time recertification is due. They can just make relevant updates to their application.

The Grandfather clause applies to certifications issued before 15^th October 2019. Such a certificate will still expire in 2 years from the date of approval but any future recertification that such condo owners seek will only expire in 3 years (and not 2 years) from the date of approval. Noteworthy is that the FHA will continue to consider recertification 6 months after the certification date has expired. This is the implication of “an extra 6 months” covered in the final rule. Caveat: once these 6 months pass, the application won’t be considered for recertification but will otherwise need to get a complete certification again (blimey!)

Buckle up, realtors!

For realtors, this is a time for real action; a time to show their twinkle toes.  They have to communicate with their clients and tell them about prospective condo buyers. Realtors would know the cases where 1) condo owners suddenly start fulfilling qualification criteria owing to the latest changes or 2) require making few tweaks in order to toe the “final rule” line.

There is no stopping the first-home buyers making the most of this guideline-change-induced opportunity. Prepare lenders, the influx arrives and now!

Photo by Expect Best from Pexels