August 28, 2009

FHA Loans Will Soon Require Ongoing Approval of Entire Condominium

Loans insured by the Federal Housing Administration (FHA) are the best financing option for many prospective condominium buyers. FHA loans have the smallest down payment required in the industry (3.5%) and flexible qualifying standards. The availability of FHA loans makes it easier for condominium owners to sell their units and enhances property values. Unfortunately, ensuring continued access to FHA loans is about to get more complicated.

A condominium unit is currently eligible for FHA financing if the entire condominium is FHA approved or if a unit owner successfully completes a “spot approval” process. Since most condominiums in the Puget Sound area are not FHA approved, the spot approval process has been the only way that most condominium buyers can take advantage of these types of loans. However, the FHA spot approval process is being eliminated on October 1, 2009. Potential buyers of units at most condominiums will soon have no access to FHA loans unless boards take action to secure and maintain FHA approval for their condominiums.

The FHA approval process typically takes a few months to complete. Numerous documents must be produced, and the agency must evaluate eligibility requirements like percentages of delinquent and rental units (must be no more than 15% delinquent and at least 50% owner-occupied) and the age of the association’s reserve study (must be no more than 12 months old). Attorneys, property managers, and other real estate professionals can help condominium associations understand whether they can obtain FHA approval and how to apply if they are eligible.