Back in 2010 FHA changed its rules for offering mortgages on condo units. The rules became so strict that a large number of condos across the country would not qualify for an FHA loan.
Thankfully, changes are here.
As of October 15, 2019, FHA will allow financing on individual condo units. The practice is commonly called Spot Approval in the real estate and mortgage world. This refers to approving a loan for one condo unit that is part of a condo project not approved for FHA lending.
Why Condos are Treated Differently
The basic difference between a condo and a normal home deals with the land. When you buy a normal home, you are also buying the land together with the structure. This allows the owner to make changes to the home such as painting the exterior, adding vinyl or aluminum siding, or adding a garage, just to name a few examples.
With a condo, a person may own an individual condo unit and then make payments to a Home Owner’s Association in order to have access and use of common areas. Examples of common areas could be a swimming pool, tennis court, exercise room, or a meeting room. Because all of the individual unit owners are all paying to use these areas, it restricts how an owner can make changes to the unit.
The Home Owner’s Association has the legal right to foreclose on an individual owner if the fees do not get paid. This puts the mortgage lender in a bit of a risky situation.
New Rules Taking Place
Now that FHA has changed its rules to allow financing, there is some clarification of the new rules
- Limits on Investors – No more than 50% of the condo units may be owned by investors. FHA wants to try and limit their exposure in condos that are primarily rentals.
- Condo Unit Limits – if a condo project has over 10 units, only 10% of the total number of units can be financed via FHA. If the project has 10 total units, then only 2 of those units may be financed via FHA.
- Commercial Restrictions – if the condo project has commercial units, the commercial units are not allowed to total over 35% of the entire project’s floor space. Essentially, FHA is aiming to limit the chance that they are lending on a project that is predominantly a commercial operation.
Your local mortgage lender can provide more details about property requirements for specific condos in your area.
What the New Rules Mean for Borrowers
Essentially, this change in FHA rules for condos will make more homes available for FHA financing. Over the last few years, condos were a tiny percentage of the overall number of existing FHA loans. By bringing back the spot approval, more people can seek out condos for potential loan approvals.
Summing Up FHA Spot Loan Approvals
With the change, it is likely that condos will see a rise in value. Since more people will be in the market to buy the properties, the rise in demand should result in better values for existing condo owners and slightly higher prices in the coming months for new condo sales.