FHA Eases Guidelines for ‘Single Unit’ Condo Approval, Starting in 2019

Highlights from this report:

  • New guidelines allow for FHA approval of individual condominium units.
  • Individual condos can be approved even if the project is not approved.
  • These changes, announced in August, take effect October, 15 2019.

Individual Condo Unit Approval for FHA Loans

Earlier today, the Department of Housing and Urban Development (HUD) issued a press release to announce new rules and policies regarding FHA loan approval of condominium units.

In the past, a person who wanted to purchase a condo using an FHA loan had to choose a unit that was located within a previously approved condominium project. In other words, the entire building had to receive approval before a person could buy an individual unit with an FHA-insured mortgage loan.

But that’s going to change starting in October. After October 15, 2019, the federal housing agency will allow the approval of individual condo units. This is a major policy change, and it’s long overdue according to many real estate and mortgage industry professionals.

To quote the HUD press release:

“In an effort to promote affordable and sustainable homeownership, especially among credit-worthy first-time buyers, the Federal Housing Administration (FHA) today published a long-awaited final regulation, and policy implementation guidance, which establish a new condominium approval process.”

This change will make the FHA loan program more “flexible and responsive to market conditions,” according to housing officials. The new rules and guidelines will allow certain individual condominium units to qualify for FHA mortgage insurance, even if the rest of the project / building has not yet been approved for the program.

Changes Take Effect in October 2019

As mentioned, the new policy takes effect on October 15, 2019. The new requirements and guidelines will be added to the “Condominium Project Approval” section of the Single Family Housing Policy Handbook (also known as HUD Handbook 4000.1). That’s the official policy guide for the Federal Housing Administration’s mortgage insurance program.

According to HUD officials, the new condominium policy for FHA loans is part of a broader effort intended to reduce “regulatory barriers” that might exclude certain borrowers or home buyers from the real estate market.

New Condominium Rules at a Glance

The full details regarding the new requirements for individual condo unit approval have been added to the Federal Register.

Below, we’ve pulled out some of the key highlights:

  • This policy change introduces a new “single-unit approval process” for certain condos in the United States.
  • The new guidelines will make it easier for individual condominium units to qualify for FHA-backed mortgage financing.
  • If the non-approved condominium project has 10 or more units, up to 10% of them can be FHA-insured. (To extend eligibility beyond that 10% limit, the entire project would probably have to be approved.)
  • Non-approved projects with fewer than 10 units can only have up to two FHA-insured units.
  • The new policy will also lengthen the recertification requirement for approved condo projects from two to three years.
  • Additionally, these changes will relax the eligibility requirements for some “mixed-use” developments (that offer both residential and commercial space).

There are other guidelines as well, in addition to those highlighted above. They will be included within the newly updated Single Family Housing Policy Handbook, which is available online. Lenders and borrowers can refer to that handbook to learn more about single-unit condo approval for FHA loans.

Especially Helpful for First-Time Buyers

According to HUD Secretary Ben Carson, these FHA rule changes could be especially helpful for younger first-time buyers, as well as some seniors:

“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families … 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.”

While the FHA loan program is not limited to first-time buyers, that group accounts for the majority of condo purchases that are financed through the government-backed loan program. According to HUD data, 84% of FHA-insured condominium buyers have never owned a home before.

In addition to helping first-time buyers, the new condo rules are expected to significantly increase the number of approved projects.

There are more than 150,000 condominium projects located throughout the United States. However, as of summer 2019, only about 6.5% of them were approved to participate in the FHA loan program.

Once this change takes effect, HUD estimates that an additional 20,000 to 60,000 condo units per year could become eligible for FHA-insured mortgage financing.

As a result of all this, the Federal Housing Administration loan program will likely take a bigger share of the mortgage market in 2020. Buyers who had to rely on conventional financing in the past to purchase a condo might now be eligible for the FHA loan program.

Disclaimer: We are not affiliated with the Department of Housing and Urban Development or the Federal Housing Administration in any way. The information above is for educational purposes only and does not constitute official policy. To learn more about these changes, refer to the HUD website.