Buying a Condo With an FHA Loan?

The Federal Housing Administration (FHA) has been a veritable beehive of policy change over the past month. We’ll be discussing the impact of a lot of these changes in the next few days, but we’re starting things off with the changes to the condo approval process that went into effect on February 1st, 2010. Essentially, if you’re trying to buy a condo using an FHA loan, you’ll need to be sure the condo project is already on the FHA’s approved list, or be prepared to deal with some delays and extra legwork.

HUDBefore February 1st, if you were hunting condos with the intention of getting an FHA loan, you had a couple of options. One was to consult the list of condo projects already approved by the FHA. If a project was on the list, it already met the FHA’s requirements, and you were pretty much good to go.

If the condo project wasn’t on the approved list, you had a second option – Spot Loan Approval. The Spot Loan process required the condominium project’s Homeowner’s Association (HOA) to complete a relatively simple two-page questionnaire designed to suss out the project’s overall health. If successful, this process would allow you to move forward with the purchase of your condo unit, without requiring the entire condo project to go through the more rigorous (and time-consuming) process of full FHA approval.

But as of February 1st, the Spot Loan Approval process has been 86′d.

What does this mean for you, the would-be condo buyer? If you’re planning to get an FHA loan, you have even more incentive to start your search on the FHA approved condo list. Since these are condo projects that the FHA has already approved, getting financing for one of these units should be relatively straightforward, depending on your own loan-worthiness. Keep in mind, however, that projects will be required to be recertified every two years after the date of their placement on the approved list.

What if your dream condo isn’t in a project on the FHA approved list? The short answer is: the condo project must get on the FHA approved list. How does that happen? You’ll need to work with your lender to complete one of the following processes:

First, your lender can submit all the necessary paperwork to the HUD Review and Approval Process, or HRAP. There’s a lot of chatter on the net that this process will take 4-6 weeks, but the HUD‘s press release states the process has been “streamlined to allow for uncomplicated condominium project approvals.” Ahem.

Alternately, your lender may be authorized to review and approve the condo project. This route, known as the Direct Endorsement Lender Review and Approval Process (DELRAP), may prove to be the speedier of your two options. It’s only available via lenders who have unconditional Direct Endorsement authority. Meaning that they have specific staff and expertise dedicated to the process of reviewing condo projects. Which is probably a good thing, when you read through a list of the requirements for condo approvals through DELRAP.

The following is a summary of that process as taken from the HUD’s press release; for the nitty-gritty, check out the full HUD press release on the subject, and skip ahead to section V: Project Eligibility Requirements.

  1. Minimum Number of Units: Projects must consist of two or more units.
  2. Insurance Coverage: Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance.
  3. Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act.
  4. Commercial Space: No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be free of adverse conditions to the occupants of the individual condominium units.
  5. Investor Ownership: No more than 10 percent of the units may be owned by one investor.
  6. Delinquent Homeowners Association Dues: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.
  7. Pre-sales: At least 50 percent of the total units must be sold prior to endorsement of a mortgage on any unit.
  8. Owner-occupancy Ratios: At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.
  9. Legal Phasing: Legal phasing is permitted for condominium processing. In other words, if a condo high-rise is half-built, the project may still be eligible for FHA approval, as long as the building meets certain requirements. Floors must be “phased in” in groupings of no less than five floors, amenities and common areas must be complete, a temporary occupancy certificate must be secured, and a third party completion bond obtained.
  10. FHA Concentration: Basically, the maximum concentration for FHA loans in any one condo project is 30%, plus a small tolerance to accommodate for some fall-out. (Note: This percentage has actually been upped to 50% until December 31, 2010, and can even go as high as 100% under certain conditions. For more information, check out the HUD’s Temporary Guidance for Condominium Policy.)
  11. Budget Review: Mortgagees must review the homeowners’ association budget (the actual budget for established projects or the projected budget for new projects) for all projects.

Simple, right?

So, pick your condo off the FHA approved list, or prepare to kill some time while the condo project goes through HRAP or DELRAP.

For purely historic value, here’s a link to the old Spot Loan Approval form (pdf, form no longer in use).

(Photo credit: Heather_Lucille on Flickr/Paramount Pictures. Special thanks to Matt Allen of Cornerstone Home Lending for his assistance with this post.

Discussion

  • http://findire.com/StandardPropertyDetails.aspx?listingID=2846 quantum on the bay condos

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      • http://www.facebook.com/people/Vivek-Gupta/737887177 Vivek Gupta

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  • Ankur

    My lender can’t figure out whether a condo we want to buy is on the list or not. There are some sites which offer to tell you for $2 an address, so I am trying that. They say the HUD list is not uptodate, also all the links in the article do not work.

  • bryanhowell

    Hi Ankur,

    I checked the links in the article — you’re right; it looks like there might be a problem with the HUD’s server. Hopefully they’ll have their site up and running again soon. Once that happens, the links should all work.

    I’d be interested in knowing what sites you’re using, and how they’re getting the information. Could you post that info here?

    Thanks for the comment.

  • bryanhowell

    Looks like the HUD site is back up — the links should all work now.

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  • http://www.Your-Housefinder.com David Phillips

    In Virginia Beach, we have a unique home which is considered a no fee duplex condo where there are no condo docs or anything else. Both units are owned in fee simple. The lender just forwarded me a DELRAP and after looking at the forms, there are so many things that do not apply, so I have my doubts that this is going to work as there is no condo association, budget, or anything else. To top it off the deal is a short sale in which we have approvals in writing from the lien holders. Who said selling real estate is easy? Something else I ran into the last 6 months was a very small condo association that was self-managed with no sales in 3 years and not approved by FHA by I had the checked up front when the property was listed.

  • MJK

    My lender said no condos at all. I don’t know if being on the list matters at all to them…

  • http://www.redfin.com bryanhowell

    Hi MJK,

    Were you hoping to buy using an FHA loan?

    If you’re willing to share your story, I’d be very interested to read more.

    Thanks!
    –Bryan

  • Ben

    David,

    If the units are fee simple, then they are not condos. That would be why there are no docs, no association, etc. Is each unit on it’s own separate lot with a common wall between them? If that’s the case, it can be financed just like any other single family house. The only unique thing is that there should be a common wall agreement between the two lots.

    Ben

  • Cherie

    We are trying to buy a condo which is not an FHA approved property. Our lender is working with us on the DELRAP process. This is 3-unit condo complex, one unit is in short sale/ preforeclosue staus and is deliquent in homeowner dues (7 months). Question: Is the no more than 15% deliquncy of HOA dues include properties in short/sale preforclosure status?

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  • Justin

    I own a condo and am trying to sell it. We have a buyer approved for a loan, but last week we learned it would be denied since one of the other owners in the complex owns 25% of the units. Is there any way for us to get around this?

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  • http://www.homeloanartist.com Brad – Home Loan Artist

    Great post…very conclusive of what is required. I find it very odd that a listing agent would not bother to find this info out in order to sell a condo…..why is that? isn't that their job so that they can market it properly? I see listing agents accept FHA offers and waste 2-3 weeks finding out the hard way that the HOA doesn't meet any of the criteria…..in fact, they aren't even aware their are criteria! Good grief Charlie Brown.

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    I was actually considering buying a condo…

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    Would you rather live in Gulf Shores Alabama, or Clearwater Florida?
    I am thinking of moving to a warmer climate and looked on line for condos for sale near or on water.Florida, the taxes are high, but Alabama the home owners insurance is very high.They both have many pluses.

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    I am thinking of moving to a warmer climate and looked on line for condos for sale near or on water.Florida, the taxes are high, but Alabama the home owners insurance is very high.They both have many pluses.

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    The solution is to FHA financing. FHA loans only 3 1 / 2% down. It just a small down payment program for condominiums and selection programs for first time buyers, condominiums and a huge population.

  • http://www.Your-HouseFinder.com David

    Ben & Brad

    We have a unique situation in our area where there are condo docs on these 2 unit condos so they are considered condos not townhouses. There are consider No Fee Duplex Condos. Therefore, we can meet all the requirements on these except having a budget as there are no fees Many lenders outside are area start asking us questions as they do not understand this as I represent several builders in the area that build these units around the beach. Therefore, they are not owned in Fee Simple. We would not have an issue then! As of Sept, 2010, there is still no fix to this issue, so we still can not get FHA buyers into these units. VA or Conventional loans only! Please reform soon and take care of this issue for at the beach! We never had this issue until the new regulations came out and many loan officers do not know about the issues either.

  • Lanny

    DAVID,

    I have closed on one of these. We had to go through HUD Santa Anna home ownership, find your local home ownership center and they should be able to help. We wrote a budget that had on income or expenses.

    Lanny Clark

    Land/Home Financial Pinole CA

  • http://www.thebayviewtowers.com/en Real Estate Hanoi

    Great article! Condo owners not only share common walls and roofs, they also share one anothers financial burdens. Lending practices are constantly changing which is forcing lenders to look more closely at the makeup of entire complexes before they fund loans to prospective buyers or to people who have equity and want to refinance.

    With the ever changing real estate market it's making it tougher to buy and sell condos, which are widely considered the housing market's shakiest segment because they are popular with entry-level buyers. The lending practices are also charging higher fees and requiring larger down payments from condo buyers while limiting where they can live. A lot of foreclosure-related losses have come from condo lending, pushing prices lower and wrecking condo association budgets.

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  • jackiestar

    The Federal Housing Administration will increase premiums (a.k.a. mortgage insurance) on loans guaranteed by the FHA.
    http://www.gmacmortgage.com/

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  • http://www.facebook.com/JenCollierBasnight Jen Collier Basnight

    Virginia Beach.  I have an FHA buyer who I am writing an offer for on a 2 unit no fee duplex condo tomorrow.  The owner has no condo docs which we will have to locate through the city and/or have an atty draw up.  The current owner built and owned both units from day one (1983).  Currently Condo A is rented and we are writing on Condo B.  We will have to submit to FHA for approval.  Do you know if this can be done?  Will FHA approve the condo or are we wasting our time?