New FHA Rules Affect Condo Purchase After 2/1/10

7 02 2010

The new FHA guidelines announced by The Department of Housing and Urban Development (HUD) last November is causing more headaches for lenders and buyers/sellers alike.

With the new condominium approval process, there will be fewer condo properties that are eligible for FHA financing which prevents first-time buyers from purchasing any condos that are for sale on the market. There will be less than 10-20% of FHA approved condos available in any given market in the U.S. so you can see why this presents major problems in the condo world. What will happen to the rest of condo projects that are not FHA approved? The answer is the pool of buyer will be limited to cash buyers or conventional buyers with 20% to 30% down payment only.

Beginning 2/1/10, new FHA rules are in effect:

– FHA spot approval is gone. FHA condo loans that required an FHA spot approval are no longer available. This mean no more spot appraisals after 2/1/10 so it will be harder to get an approval on a condo project unless it has been approved by HUD or one of HUD’s approved lenders. Effective for all case numbers issued on or after 2/1/10, all previous FHA condo approvals will be eliminated and condominium projects must be re-certified by HUD. (Previously, FHA spot approval allows an FHA-approved direct lender to approve a specific condo unit even if HUD hasn’t FHA-approved the building. Spot eligible condo buildings must be 4 units or larger, 90% sold, 51% owner-occupied, and no single entity can own more than 10% of the project. Unit owners must be in control of the HOA for 1 year, and the HOA must have roughly 50-60% of annual budget in reserves.)

– Going forward there will be two approval methods for FHA Case numbers ordered after February 1, 2010:  HUD Review and Approval Process (H-RAP), DE Lender-Approval and Review Process (DEL-RAP).

– All FHA case numbers issued AFTER 4/5/10 will require the up-front PMI of 2.25% (this is increased from 1.75% today.)

– Early summer – Seller contributions on ALL FHA loans will be reduced to 3% (this is reduced from an allowed 6% today.)

– FHA has waived the flipping rule for all purchase made after 2/1/10. Private sellers and investors can now sell their properties to FHA buyers without having to wait 90 days (seasoning.)

After 2/1/10, Spot Approvals are eliminated and HUD must directly approve entire condo buildings, a 1-3 month process. If a buyer who is looking for an FHA condo loan on a non-FHA approved project, now it will be very difficult to do so.

Currently, there are 67 condo projects in Jacksonville Florida market that are on FHA approved list. Most condos in Jacksonville no longer qualify for the FHA loan. Most lenders will not lend on condos unless you have 20%-30% to put down. This will definitely slow sales and end up decreasing values in certain segments of the condo market throughout the country.

Right now if you are looking to buy a condo, you have two choices:

1. Choose the projects that are listed on the FHA approved list.
2. If the projects are not currently on the FHA approved list, seek condo approval directly with HUD (which administers the FHA mortgage program)

My recommendation is to buy NOW and buy new construction as most builders will pay up to 6% in sellers contribution (this will be limited to 3% soon.) If you need to buy a resale, you need to find out first if the condo you are interested in is on the approved list at

There are different ways to search but I suggest you start searching by zip code or the legal name of the condo community. A good portion of the approved condos are listed by mistakes, so if you don’t get a hit on the first try, don’t get discouraged. If the condo project you are interested in is already on the approved list, you can move forward. But the lender still has to certify things about the current condition of the condo project. Whether this is a long time approved project or one approved last week, the lender still has to verify the following:

– Is the condo project involved in any litigation?
– Are there any pending special assessments?
– Does any single entity own more than 10% of the total units?
– Are more than 15% of the owners delinquent with their association dues?
– Are at least 51% of the sold units owner-occupied?
– Does the project meet the requirements for FHA concentration (no more than 50%, unless certain conditions are met)?

The lender goes through these questions using a condo questionnaire sent to the condo association or the management company. Please keep in mind that there are new projects that are being added on to the FHA approved list . Every time HUD (or a direct endorsement lender, eventually) approves a unit, all the other units in that project (up to the maximum concentration) will also be placed on the FHA approved condo list. And HUD is bending some rules to make more projects eligible. When HUD released the new guidelines last October, all projects that were not on the approved list last year would not be included on the approved list until they are “re-certified.” HUD is now giving these properties a one year grace period, so they will be on the list as eligible up until 12/7/10. The re-approval process for these projects will be much simpler than the process for new projects (brand new constructions.)


With increasing tougher lending guidelines through conventional financing, FHA spot approval has been an answer for most lenders to obtain condo financing for their buyers. In the past, FHA was deemed unnecessary as the approval process was time consuming and paperwork intensive for developers to go through. When the real estate market was red hot, home prices skyrocketed and lending requirements were easy for most buyers to qualify (remember the time when people with no income, no asset, no money down, and no job could buy a home?) Developers didn’t have to get FHA approved for their condo projects. It’s not surprising we have a small numbers of condo projects that are on the FHA approved list. Nowadays, developers have to petition for a condo project approval when they are building a community (brand new or condo conversion) if they want FHA financing available to buyers. The FHA spot approval was a way to approve one condominium unit, not the entire building. It was part of the purchase process; while the lenders went through the work of approving the borrowers, they would approve the condo unit at the same time. It was a great program and it helped many buyers obtained FHA financing with limited cash and down payment. However, there were some issues:

– The FHA spot approval did not apply to smaller buildings so condos less than 4 units could not qualify for the program.

– The FHA spot approval did not accept condos with “First Right of Refusal” language written in condo docs. The reason being it can be used to discriminate some buyers.

From HUD’s point of view, the spot approval presents problems because HUD did not have control and loans were closed and funded on properties that did not meet the guidelines. So the new condo approval process was introduced to address these problems. The new condo approval process allows properties that have the “First Right of Refusal” language, and it can be used with projects as small as 2 units.

Under the new guidelines, lenders can approve a new condo in two ways:

1. Go directly to HUD (HRAP) and file all the paper work directly with HUD. Most developers have done this in the past.

2. FHA Direct Endorsement lenders (DELRAP) would have the authority to approve the projects on their own. This works similarly like spot approval. When the borrower buys a new condo, the lender will scrutinize the building as part of the approval process and will approve the project at the same time. Once a direct endorsement lender approves a project it will be added to the FHA approved list and then any other lenders who make FHA mortgages will be able to provide FHA financing for the entire project. However, there is a flaw in this process and I am sure they didn’t think of the consequences:

Under the new FHA condo approval process, HUD needs more documentation and more express warranties from the direct endorsement lender approving the project. The deadline for this was extended twice while HUD tried to iron out the kinks and get the lenders on board, and they allowed the spot loan to continue as a way to keep financing open. But now the spot loan is gone and the new improved process is not ready to take place.

Condo buyers can still buy anything that is currently on the FHA approved condo list, but what are the options if they want to buy in a building that has not been approved? And how about developers or sellers who own the condos? What options do they have for getting their project approved?

Being able to finance with FHA is a a real competitive advantage in this market. Any properties with FHA financing are selling quicker and this appears to make them more valuable. There are also a lot of newer properties that do not meet conventional guidelines because they have not sold and closed enough units but would be eligible for FHA financing.

The FHA saga continues…

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