New rules and guidelines—including the return of spot approvals—open the door to condo homeownership for thousands, and expose the government to more risk
The Federal Housing Administration (FHA) has published new guidelines for an updated condominium approval process, responding to a strong demand for affordable housing nationwide.
Included in the new guidelines are the introduction of a new single-unit approval process to make it easier for individual condominium units to be eligible for FHA-insured financing; the extension of the recertification requirement for approved condominium projects from two to three years; and the inclusion of more mixed-use projects that are eligible for FHA insurance. The polices will go into effect on Oct. 15.
“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families and it's critical that FHA be there to help them,” Housing and Urban Development Secretary Ben Carson said in a statement. “Today, we take an important step to open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age in place.”
HUD believes the changes will extend critical benefits to aspiring homeowners and confirm the agency is properly serving the public.
“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,” said Brian Montgomery, HUD acting deputy secretary and FHA commissioner.
The changes are expected to help alleviate affordability concerns in markets across the country and increase the available opportunities for many more potential buyers to get their foot in the door. This applies to both qualified first-time buyers who have faced down payment hurdles, been priced out of the starter home market or been victims of a low-inventory environment; and also to older homeowners looking to downsize but unable to find a home that makes financial sense.
The National Association of Realtors (NAR) commended the Department of Housing and Urban Development (HUD) for finalizing these new condo loan policies.
“We are thrilled that Secretary Carson has taken this much-needed step to put the American Dream within reach for thousands of additional families,” said NAR President John Smaby. “It goes without saying that condominiums are often the most affordable option for first-time homebuyers, small families and those in urban areas. This ruling, which culminates years of collaboration between HUD and NAR, will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people.”
Some people, however, have expressed some skepticism about the loosening of these rules, which were put in place after the last financial crisis more than a decade ago. The primary concern is that it could expose the government to more risk, heightening the likelihood of loan default if the housing market continues to slow and housing prices continue to fall.
The new policy will also allow certain individual condominium units to be eligible for FHA mortgage insurance even if the condominium project is not FHA approved. An individual unit may be eligible for Single-Unit Approval if the individual condominium unit is located in a completed project that is not approved; for condominium projects with 10 or more units, no more than 10% of individual condo units can be FHA-insured; and projects with fewer than 10 units may have no more than two FHA-insured units.
These single-unit approvals, also known as “spot approvals”, were popular during the last housing boom, but eliminated in 2008. Now the HUD is allowing them once again, although they insist that appropriate restrictions and requirements are now in place to avoid the misuse of spot approvals and the ensuing fallout.
During NAR's most recent existing-home sales report, June condominium and co-op sales were recorded at a seasonally adjusted annual rate of 580,000 units. The figure represents a decline of 3.3% from May and a 6.5% drop from the same time last year. With more than 8.7 million condo units nationwide, only 17,792 FHA condo loans have been originated in the past year.
NAR Chief Economist Lawrence Yun recently noted that even though median prices for existing condos have risen slightly, their relative affordability means condominiums remain a natural answer to inventory shortages holding back home sales growth.
“Condos are typically more affordable than a detached single-family home, but only a small fraction of condos are FHA-certified,” Yun said last month.
NAR has advocated for changes to FHA's condo policies that include allowing owner-occupancy level determination on a case-by-case basis, granting up to 45% commercial space without documentation and including a five-year approval period for project certification.
The FHA issued proposed changes to its condo rules in 2016 that would have allowed individual condo units to become eligible for FHA financing, but the proposed rules were never finalized.
HUD estimates that these new rules could cause anywhere from 20,000 to 60,000 condominium units to become eligible for FHA-insured financing annually.
