Condos often serve as an entry point to homeownership, but also serve buyers who have limited funds for a down payment. Unfortunately, the Federal Housing Administration made it difficult for Buyers by severely restricting the inventory available to purchase using FHA Financing.
While single family detached homes do need to meet certain safety requirements which are reviewed by the FHA Certified Appraiser, the restrictions are generally related to health and safety and most detached home purchases would meet the requirements.
Condos and other attached homes, however, are not eligible for buyers to purchase unless the unit is in an FHA approved project. This isn’t as easy as one might think. According to the National Association of REALTORS, there are more than 150,000 condo developments in the U.S. but only 6.5% are eligible for FHA financing.
After the housing melt down in 2007, The FHA required condo associations to renew their approval status every two years. The certification process requires piles of paperwork regarding budgets, insurance, reserves, occupancy, and HOA dues collections to be provided to FHA for processing along with hefty fees. Many projects don’t want to bother with the certification process due to cost and hassle. Once the certification expires, none of the units in that project are eligible for FHA financing.
As you can imagine, this severely restricts the inventory available to buyers who may not have other options for financing.
A huge break is right around the corner, though. Under new Housing and Urban Development (HUD) rules which take effect October 15th, 2019, a single condo in an unapproved project can be financed by FHA if it meets simplified criteria, such as the project itself must be completed (no longer under construction), and must be at least 50% owner-occupied. Only two FHA financed units are permitted in a project with fewer than 10 units and no more than 10% of the total in larger developments.
It is estimated the new rules will make between 20,000 and 60,000 more condo units eligible for FHA financing each year. In our current environment of low inventory, this is a huge win for buyers. This change also provides an advantage to condo sellers, opening up their property to an entirely new buyer pool.
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