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 1^st, 2010. Essentially, if you’re interested in buying a condo with 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.

Before February 1^st, 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 1^st, 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). Check out this guide on residential building types for more information on the pros and cons of condo ownership.

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