By Megan Booth
Condominiums are often the most affordable homeownership option for first-time buyers, small families, single people, urban residents and older Americans looking to downsize. Beginning Oct. 15, 2019, buying a condo with an FHA-insured loan will be a whole lot easier. After years of lobbying by REALTORS®, a number of FHA rules have changed that previously prevented buyers from purchasing condominiums, harmed homeowners who need to sell their condominiums and limited the ability of condominium projects to attract resident buyers.
Unlike conventional mortgages, FHA borrowers have been limited in their ability to purchase a condominium. First, the entire building had to get FHA approval to allow units to be purchased with an FHA loan. This is a time-consuming, burdensome and somewhat costly endeavor for often volunteer condo boards. Many condo boards simply did not want to go through the process. The certification was also eligible for just two years, and took about six months to obtain, so it hardly seemed worth it for some properties. Under the new rules, the FHA certification will be good for three years, with an additional six-month grace period to re-certify. In addition, instead of having to submit the same paperwork every two years, the rules now require any necessary documentation to be updated. This should greatly reduce the burdens on condo boards, and will hopefully lead to more buildings being FHA-approved.
Under the new rules, if a building is not yet FHA-approved, an FHA buyer may still be able to purchase a unit. FHA is bringing back single-unit approval (previously called spot-loan approval). Under this process, a lender can approve an individual unit for FHA mortgage insurance. The building has to meet a number of criteria, but this change should greatly increase the supply of available condominium units for buyers with FHA loans.
One of the most popular types of condominium projects, the town-center model, also got a boost. In these types of projects, there is often retail space on the first floor, with perhaps one level of office space, and condominiums above. Under the new rules, FHA increases the allowable commercial space from 25 to 35 percent and will allow exceptions up to 49 percent. Parking garages have been a specific problem in town-center developments, because the garage is considered all commercial space. The new rules will now allow any parking spaces allocated to residential units to be considered residential—and not commercial space. That should be a significant help for these properties to be approved.
The number of units that are rented within a condominium building affects FHA certification. Unlike Freddie Mac and Fannie Mae, who do not restrict the purchase of primary residences based on the number of rentals in a condo building, FHA required 50 percent of the units to be owner-occupied to be eligible for certification. The new FHA condo rules lower the owner occupancy rate requirement to 35 percent for properties that are more than one year old and have less than 10 percent of units in arrears on their dues. This should greatly improve the number of properties that can be certified.
There are a number of other changes that will also benefit homebuyers. They are outlined at www.nar.realtor/condominiums/fha-condominium-rule-assessment.
According to a HUD press release, “While there are more than 150,000 condominium projects in the U.S., only 6.5 percent are approved to participate in FHA’s mortgage insurance programs. As a result of FHA’s new policy, it is estimated that 20,000 to 60,000 condominium units could become eligible for FHA-insured financing annually.”
The new rules go into effect on Oct. 15, 2019. Real estate professionals should work to educate condominium boards about the changes, as well as the advantages of having FHA approval.
Megan Booth is the director of Federal Housing and Commercial Policy for the National Association of REALTORS®. This column is brought to you by the NAR Real Estate Services group.