Big Changes For Condo Buyers With Less Than 20% Down

As discussed last quarter, FHA loans have become the most viable way for borrowers with less than 20% down to buy a home. Single family home FHA loans are fairly straightforward. Rules for condo FHA loans have recently changed, and it’s critical for any homebuyer targeting condos up to a price point of $850k and considering down payments less than 20% down to understand what these FHA condo rules mean.

Up until November 1, it was possible for a condo buyer to buy almost any relevantly priced condo they wanted with an FHA loan. Even if the entire condo building was not FHA approved, HUD allowed their FHA-delegated lenders to conduct a unit-specific ‘Spot Approval’. This was useful because not very many condo buildings are FHA approved—for example, there are only 23 condo buildings in all of San Francisco County approved today.

But HUD determined that fraud was too prevalent on Spot Approvals, eliminated them, and replaced them with a process whereby the entire condo project needs to be HUD-approved before it can be eligible for an FHA loan.

Good news: Once they have approved a project for one lender, all FHA-direct lenders can lend on that project. Bad news: HUD is taking 8 weeks to FHA-approve condo projects, and this queue is growing because of the rule change and HUD’s limited resources.

For FHA-financed buyers looking for condos before the end of 2009, they should focus on an already-FHA-approved condo project which can be found by going to HUD’s lookup site. Currently, there are two big issues to be aware of:

(1) Any project shown on this site as approved before November 2008 will have to be re-approved per the November 1, 2009 guidelines noted above. A condo developer or Home Owner’s Association (HOA) can call the FHA Resource Center at 1-800-225-5342 for information about how to submit an approval package to get their condo building approved. Homebuyers/borrowers can also ask their Realtor or lender about specific projects they’re interested in. Some lenders can work with developers and HOAs to help get their condo projects approved.

(2) If a new development doesn’t have a “2-10 Warranty,” a 10-year insurance policy covering everything in the building from foundation to finishes (which many new projects don’t because of cost issues), FHA limits down payments to no less than 10%—as opposed to the 3.5% down normally allowed. Again, borrowers should have their lenders and/or Realtors do an initial check for compliance with core guidelines BEFORE submitting an offer on a condo even if it is on the FHA-approved list.