Buying a condo in Seattle can be tricky in today’s heavily regulated mortgage lending environment, but it can be done.
In the past, if a condo building had not already been approved by HUD/FHA, the FHA buyer was required to go through a “spot approval” process with their lender, wherein the particular unit the buyer wished to purchase would be cleared (approved) for FHA financing.
Recently, FHA did away with the spot approval process, causing many buyers (and even real estate agents) to think that if a building is not already approved with FHA, then a buyer cannot use FHA financing to purchase within it. That is simply incorrect. The new process may even be MORE beneficial to FHA buyers. Today, all condo projects will need to be approved, re-approved, or maintain a HRAP/DELRAP status through HUD in order to use FHA financing to purchase a unit in the condominium project.
Important to note: For detached condominiums only – When HUD eliminated the “spot approval” option, they also established a new guideline that allowed for all detached condos (condos not attached to another unit or shared wall) to be considered as Single-Family Residences, therefore, no HUD approval is necessary.
Understanding An FHA Approved Condo
A condo must be in an approved project (on the HUD.gov approved condo list) or you cannot attain FHA financing for the condo. Not to be discouraging, but the list is fairly short. The reason for the limited number of FHA condo approvals is because the approval process itself is time-consuming for both the lender and HOA board, often times costly, and honestly, in today’s lending environment, there is plenty of business (“normal loans”) to go around, and in my opinion banks, loan officers, and real estate agents are too busy to put in the extra work needed for condo approval. For that reason, most condominiums forgo FHA approval, forcing buyers to use conventional loans only. The good news for you is: I work with a direct FHA lender and I can assist you and your real estate agent in getting the condo project FHA approved (if they meet the criteria below)!
Step 2: Requirements For FHA Condo Approval
HUD (insuring entity of FHA loans) has very specific and strict requirements related to financing condominiums due to numerous risk factors. Understanding what a condo is will help you understand why – A condominium is a legal entity (HOA) that owns both the common property within a project, as well as the actual physical structures that contain the housing units. The “owner” of a single condominium unit owns only the interior of the unit. The condominium association owns everything else. Therefore, the condominium association must have adequate insurance and operate under certain requirements to cover common hazards and the maintenance of the condo project.
In general, a condo project approval will be subject to the following:
* Must have adequate insurance coverage (master policy)
* Individual ownership restrictions – no more than 10% of the units may be owned by the investor
* The project must be substantially complete (new construction)
* Owner occupancy – must be 50% owner occupied
* HOA Dues up to date – no more than 15% of the condos can be delinquent on HOA Dues
* HOA Capital Reserves – the HOA must have sufficient funds in their account (review required)
* Convenient and Bi-law restrictions – FHA to review/approve bi-laws
* More info here from HUD on Condo Approval Requirements – HUD CONDO DOC
Options If Condo Isn’t FHA Approved
If the condo that you are interested in is not FHA approved, you have 3 options. I highly recommend paying close attention to these steps:
(1) Submit for FHA approval to HUD. This is typically done with your mortgage lender, real estate agent, and HOA management. Reach out to me and I can help assist you to see if this is an option.
(2) Apply for conventional financing (Fannie Mae or Freddie Mac financing). I can also help you with this. Fannie Mae and Freddie Mac DO allow for condo spot approvals.
(3) Find another condo to purchase. The one you’re looking at isn’t a good investment.
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