First time home buyers using an FHA loan to finance the purchase of a condo may not be aware that it’s not just the borrowers that FHA lenders approve but also the subject property. Both have to meet FHA muster and when financing a condominium, FHA takes it a step further and approves not just the individual condo but the entire condominium project.
The project approval historically meant that once any lender who requested a condominium project approval and received it, the project was approved for eternity. No need to have the project approved as each new borrower applied for an FHA condo loan. Yet not any more. New guidelines went into place in 2011 that changed the way condominiums obtain FHA approval forever.
FHA Condo Project Guidelines
But what exactly does an FHA approval require? What makes an FHA condo project approved and one next door not approved? The first step is to request the approval and this can come from the developer, the condominium association or an FHA lender. To obtain an approval, HUD reviews an application request that contains specific information about the project. Here are some of the key items needed in order to obtain FHA approval.
- No current or pending litigation
- Right of first refusal cannot be part of the CC&Rs
- If there is any commercial space, no more than 50 percent may be dedicated to commercial
- All phases must be 100 percent complete
- No more than 15 percent of homeowner dues may be more than 60 days late
- At least half of all units must be presold
- No more than half of the units may be used as rentals
- If there are current FHA loans, they must make up no more than half of all existing mortgages
- Sufficient insurance coverage
The condo project must also provide HUD with:
- CC&Rs, or covenants, conditions and restrictions
- Current balance sheet, budget and income statement
- Insurance policies
The condo approval process takes about 60 days but once the project has been approved, for the next two years the approval can extend to anyone using an FHA loan to buy and finance a unit. But how does the approval process affect someone already with an FHA loan and wants to refinance?
Is the Condo FHA Refinance Approved?
Getting an FHA approval for a condo is no small task but FHA lenders are familiar with the process and understand the impact an FHA approval has on a project’s marketability. When a condo earns the FHA approval, it attracts more buyers, creating a demand for the project. Yet with the new approval rules, if someone obtained an FHA loan on a project that was previously approved yet expired, can the borrower still obtain an FHA streamline loan to refinance to a lower rate? That’s an excellent question and the answer is “yes.” But a standard FHA loan may not. What’s the difference?
By definition, the FHA streamline refinance loan requires less documentation. Much less meaning there is no requirement to verify employment. There is no need to verify income or even credit. No appraisal is needed. Hence the term “streamline.” As long as there are no payments more than 30 days late within the past three months and no more than one such payment in the previous 12 months, the FHA streamline can be approved if the mortgage payment is reduced by 5.00 percent or more as a result of the lower rate.
But the key using an FHA streamline with a condo whose approval expired after the condo was previously FHA approved is the appraisal. Because there is no appraisal in a streamline request, there is no need to approve the condo yet again. However, standard closing costs on an FHA streamline may not be added to the loan amount and must be paid for by the borrower or otherwise offset by the lender.
The borrower does have the option of adding loan costs to the new loan. However, that option requires a new appraisal which then means the condo project needs a brand new FHA approval. Streamline? Yes. Standard rate and term refinance and rolling in closing costs? No. This also means if there is any cash out request in conjunction with an FHA refinance application an appraisal is needed and the condo must be FHA approved all over again.
One more thing. What about FHA’s reverse mortgage? How does the FHA reverse mortgage work in conjunction with the new FHA condo approval process? Condominium projects must also be FHA approved before a reverse mortgage approval may be obtained. The Home Equity Conversion Mortgage, or HECM is the FHA’s reverse mortgage program and all condo projects must be approved in the same fashion as any FHA approval. So what’s the final score? Which FHA loans can be used after a condo project approval has expired?
- Streamline: Yes
- Standard Refinance: No
- Cash Out Refinance: No
- Reverse Mortgage: No