A recent press release on the FHA official site announces new proposals for FHA condo loan approval procedures. According to HUDNo.16-146, there are significant alterations to current FHA loan policy that are currently under review.
“In response to changing conditions in the condominium market, the Federal Housing Administration (FHA) today proposed new regulations governing the approval process for condominium developments. FHA proposes to reinstate single unit approvals in unapproved condominium developments and to require condo projects to recertify their approval status every three years rather than the current two-year requirement.”
Individual condo units in projects that are not currently on the FHA approved list would, under these proposed changes, have a better chance of getting single-unit loan approvals if the units meet FHA criteria including (but not limited to) the following:
-The unit is not a manufactured housing condominium project or located in a two-to-four-unit project;
-The condominium unit is not a manufactured home and is in a project that has at least five dwelling units;
-The unit is in a project in which the amount of Single-Unit Approvals is limited to a maximum of 20 percent of the total number of units in the project, which may be reduced to as low as zero percent via subsequent notice.
The ability to approve individual condo units could seriously improve the availability of such units to FHA borrowers. According to the press release, the purpose of these changes in policy (which are under review and have not been made into a final rule or codified at the time of this writing) is to be more responsive to a changing housing market.
There are also some other suggested revisions that could positively affect the FHA condo loan process. “FHA currently requires that approved condominium developments have a minimum of 50 percent of the units occupied by owners.”
Not having enough owner-occupiers may “detract from the viability of a project” according to the press release, but requiring too many owner-occupiers can hurt a condo project’s marketability. “Through this proposed rule, FHA is specifically inviting comment on this issue and is proposing to establish an allowable range between 25 and 75 percent. The range allows FHA to choose a specific percentage that is responsive to future market changes.”
The press release also adds some discussion about the non-residential nature of the floor space in a given condo project. “FHA currently requires that the commercial/nonresidential space within an approved condominium development not exceed 50 percent of the project’s total floor area, and anticipates maintaining this as a requirement in the near term.”
“However, as the agency gains experience with this program, it may wish to modify this limitation and is therefore proposing to establish a range between 25 and 60 percent, which may be specified via subsequent notice, giving the agency flexibility to make any needed future adjustment within this range.”
According to the press release, mixed-use developments are a way to integrate housing, land-use, economic and workforce development, “as well as transportation and infrastructure development. While the agency acknowledges the benefits of mixed-use developments, in the near term, it believes that allowing greater than 50 percent commercial/nonresidential space may have a negative impact on the residential character of a condominium project.”
We will report on future developments related to these FHA condo loan issues as details become available from the FHA.