The long-waited Federal Housing Administration (FHA) rule regulating condominium lending was finalized Wednesday afternoon. The Department of Housing and Urban Development (HUD), the parent agency of FHA, published the final regulation and the policy implementation guidance establishing a new condominium approval process.
As a way of background, under existing rules, to obtain an FHA mortgage a borrower must not only satisfy the lender and the FHA that he or she is a qualified buyer but must purchase a unit that is itself qualified for financing.
According to the National Association of Realtors®, FHA has put its stamp of approval on many complexes, but given the universe, not nearly enough. Of the more than 150,000 condominium projects in the U.S., only 6.5 percent are approved to participate in FHA's mortgage insurance programs.
To be approved under existing rules, condo communities must submit a pile of paperwork, be vetted by the administration, make any improvements specified by FHA, and then submit to a reexamination. Specified requirements cover the percentage of owner-occupied units, budgetary reserves, insurance coverage, and HOA dues collections. There are also location requirements related to transportation access. FHA said its requirements were intended to "make sure that the property remains in good standing and will be desirable."
These requirements often left buyers selecting a condo only to find they could not obtain an FHA mortgage for which they were otherwise qualified. This has had implications for homeownership, especially for low-income borrowers, those with less than perfect credit scores, or with downpayments below the minimum level to obtain other financing. This has become increasingly problematic as prices for single-family homes have escalated, making condo purchases more important as an option for entry-level buyers.
The new rule, which becomes effective on October 15, will allow a homebuyer to obtain an FHA mortgage for an individual condo unit in an unapproved condominium project if that project is completed and meets the following criteria:
- In a development with fewer than 10 units, no more than two can be insured by FHA.
- In a development that exceeds 10 units, a maximum of 10 percent can be insured by the FHA.
- A minimum of 50 percent of project units must be owner-occupied.
The rule change also extends the certification period from two to three years and expands the eligibility criteria for mixed-use units.
HUD estimates the new rules will make an additional 20,000 to 60,000 condo units eligible for FHA insured loans each year.
HUD Acting Deputy Secretary and FHA Commissioner Brian Montgomery said, "Today we are making certain FHA responds to what the market is telling us. This new rule allows FHA to meet its core mission to support eligible borrowers who are ready for homeownership and are most likely to enter the market with the purchase of a condominium."