Many condo buyers have never owned a home before. A new FHA policy aims to expand homeownership.
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The Federal Housing Administration issued new guidelines Wednesday that aim to streamline the agency’s approval process for condominium projects. The long-awaited regulations are designed to promote affordable and sustainable homeownership, especially among credit-worthy first-time buyers.
The new policy is designed to be flexible and responsive to market conditions. For example, it will allow certain condo units to be eligible for FHA mortgage insurance even if the condo project itself is not FHA approved. The changes become effective October 15.
The approval process includes the following key elements:
Single-unit approvals allowed: FHA introduced a new single-unit approval process to make it easier for individual condo units to be eligible for FHA-insured financing provided the condo building is financially stable.
The vast majority (84 percent) of FHA-insured condo buyers have never owned a home before. While there are more than 150,000 condo projects in the U.S., only 6.5 percent are approved to participate in FHA’s mortgage insurance programs. It is estimated that 20,000 to 60,000 condominium units could become eligible for FHA-insured financing annually as a result of FHA’s new policy.
Project approvals extended: FHA approvals for condominium projects have been extended to three years from two years.
Recertification process simplified: Condominium projects seeking recertification are only required to update new information rather than resubmit all project information. The new rule extends the time frame for recertification to three years from two.
Commercial space restrictions eased: This allows more mixed-use projects to be eligible for FHA insurance.
Owner occupancy rates lowered: Condominium projects with owner occupancy rates as low as 35% will be eligible for FHA approval based on the project’s financial and operational stability. FHA previously required at least 50% of units in a condominium to be owner-occupied.
FHA concentration rate increased: FHA will now insure up to 75% of condominium unit mortgages in a condo project.
Future policy changes opened to public comment: FHA will provide a 30-day public comment period before implementing future changes to the condominium approval process.
Frank Nothaft, chief economist for real estate data provider CoreLogic, said the new policy could clear the way for a more level playing field for first-time home buyers.
“Requiring a project to be FHA certified has closed the door to FHA financing for many condo projects,” he said. “Condos often are a lower-priced entry point into homeownership. The new policy increases access to FHA financing for more first-time buyers.”
Evidence continues to mount that condo sales will play a more significant role in the mortgage origination market in the next few years, according to CoreLogic. With a flood of Millennial first-time home buyers expected to soon enter the market for affordable housing, CoreLogic foresees rising demand for condos in the near future.
The Community Associations Institute also applauds the actions by the Department of Housing and Urban Development to streamline the FHA condominium project approval process. The Foundation for Community Association Research estimates that 40% of the nation’s 27 million community association households call a condo home, accounting for about 10% of the nation’s housing stock.
Dawn Bauman, CAI’s senior vice president for government and public affairs, said in a statement that after the housing crisis in 2008, “the FHA condominium approval process severely impacted access to FHA-insured mortgages, which hurt homeowners and household formation. This is counter to FHA’s statutory mission, its reason for being. A balanced, data-driven condominium approval process at FHA has been a long-term public policy priority for CAI. (Wednesday’s) announcement marks a return for FHA as a key long-term partner for condominium associations.”
David Ledford, executive vice president of Housing Finance and Regulatory Affairs for the National Association of Home Builders, isn’t completely sold on the FHA news. He said HUD’s announcement “just highlights things they wanted to highlight.” For example, he noted that HUD hasn’t made any changes in regards to down payment requirements.
“I think the one thing that everyone is really focusing on is their reinstatement of the ability to do single-unit approvals in cases where the condo building itself has not yet been approved by HUD,” said Ledford. “There’s been a lot of focus on that. They stopped doing that during the financial crisis.”
He explained that condo units are viewed more broadly as a way to provide affordable housing in many markets where detached and townhouse homes are more expensive and not accessible for first-time home buyers and others who are trying to gain access to homeownership.
Existing condominium and co-op sales were recorded at a seasonally adjusted annual rate of 590,000 units in May, up 1.7% from the prior month and down 3.3% from a year ago, according to the National Association of Realtors. The median existing condo price was $257,100 in May, which is up 5.4% from a year ago.
Ledford said the National Association of Home Builders is already concerned that the FHA has decided it will no longer approve a condo project until it has been fully completed and has significant occupancy, a move that could expose builders to risk.
“That’s problematic for our members in that it really prevents them from selling units ahead of time,” he said. “It just delays the whole project getting on good footing.”
However, Ledford points to a provision that provides for a project to be done in phases. Only time will tell if that meets the challenge for builders.
“If you’re doing 200 units, you could do 50 units at a time or some smaller bites, so at least you don’t have to wait until you finish the whole property,” Ledford said, noting that HUD has been getting more involved in mixed-used projects to address housing demands.
“Right now, there are point limits,” he said. “For example, you have to have 50% of the units owner-occupied before HUD will guarantee or insure mortgages on additional units. And you can’t have more than 50% of FHA-insured units in a property. They are now establishing ranges, for example, on the owner-occupancy. It could be between 30% and 75%.”
Still, Ledford said NAHB is generally pleased that the FHA has finally released the guidelines.
“It’s been a number of years in the making,” he said. “There was a lot of uncertainty as to what was going to happen, so it’s nice to have some certainty.”