The Home Buyer's Korner

Information presented should be used for educational purposes only.

November 12th, 2014

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Condominiums ~ An Affordable Place to Call Home  

MilliennialsCondominiums offer many advantages to home buyers from millennial to seniors and FHA insures mortgages on these properties, but the development has to be approved by the agency. If you’re someone who would or thinks you’d be interested in living in this type of community, you need to understand how condominium project work and what it means for a condominium development to be FHA approved.

FHA is a widely used mortgage insuring programs within the US Department of Housing and Urban Development that puts the full faith of the US government behind certain loans that meets their criteria. In doing so, they become highly valued securities investment bankers package and sale worldwide, which is a big part of why our nation is one of the wealthiest countries in the world. But, let’s get back to your mortgage, before we have a larger economics course on globe finance.

As I mentioned earlier, because an FHA loan has the backing of the US Government, risk for investors to purchase your loan is extremely small and why they are so desirable. FHA loans also on average have lower FICO score home buyer, but again because they are insured by the US Government your loan is as desirable to an investor as a home buyer’s mortgage with a 780 or higher FICO score. 

When someone invest their money, it’s all about yield and risk.  Because US Government has never defaulted on its debt and is insuring your loan, it allows HUD to extend extremely attractive financing options that none of us otherwise could enjoy.  With an FHA loan you need only make a down payment of 3.5 percent and finance your mortgage over 30 years. Before the program was created in 1934, home buyers normally had to put down 50% and financing terms were for about 60 months. Another benefit a home buyer gets with an FHA loan is a competitive interest rate, simply because the risk is minimal to an individual investor.

Properties financed by FHA insured loans must be a primary residence. FHA is not intended to be used by an individual wanting an investment property or second home.

FHA has strict criteria on condominium guidelines for a condominium project to get it approval to offer mortgages within the community. The condominium association, for example must be certified by FHA before it will back any loans on a unit in the development to make sure it is well managed and financially stable.

In September 2012, the FHA made requirements for condominium developments approval a bit more attractive to many home buyers. This included increasing the commercial-to-residential ratio in mixed-use condo developments to allow for more commercial space.  I don’t know about you, but I like the idea that I could have a deli, fast food store, dry cleaner or other businesses within my development and the home owners association (you) gets to determine what types of business can operate in my development.  

FHA also eased requirements that the association had no more than 15% of units owners having delinquent condo fees more than 60 days, which use to be 30 days and in-line with other successful developments.

In the past, no single investor could own more than 10% of units in the development, but that was increased to 50% as long as half of units had been sold or are under contract. This rule was very restrictive especially to smaller condominium developments. You can see that if a development only had 10 units and a unit owner who lived in the development wanted to purchase another unit for an investment, it would jeopardize the developments FHA approval.

Also, units owned by a developer that have not yet been sold and were not rented or previously occupied were considered investor-owned under the old criteria.

FHA through its parent organization HUD has a comprehensive list of approved developments on its website where you can search for FHA approved condominium developments throughout the U.S. You can narrow your search by entering as much or little criteria as you would like including state, city, county, zip code or condominium development name. You can also work with a real estate agent with expertise in the area in which you are searching to find FHA-approved condominium development and find out more about it that a website just can’t tell you.

Finding an FHA condominium development to call home is only half the battle. You will also have to get past the condo association’s board. Many look down on investor-only purchases that are intended to be flipped for a profit or rented long or short term for income instead of occupied by the owner. Associations also don’t want to lose FHA approval if too many units are rentals and owner occupied units dip below 50%.

Unfortunately finding an FHA approved condominium development may seem daunting, especially since they only account for about seven percent of all the condominium developments nationwide. But, proponents of condo developments that are FHA approved maintain that they increase the pool of potential home buyers, which is good news for a unit owner when it comes time to sell.

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