FHA Condo Loans

FHA Condo Loans

The Federal Housing Administration (FHA), which administers the FHA Loan program, was created in 1934 as part of the National Housing Act during the great depression. The FHA is responsible for stabilizing the mortgage market by providing mortgage insurance backed by the federal government for mortgages originated by FHA Approved lenders.

There are several loan programs that the FHA offers; today I want to highlight FHA Condo Loans, as provided by FHA section 234(c). This 30 year fixed-rate loan often works well for first time condo buyers because it allows individuals to finance up to 97% of their condo loan which helps to keep down payments and closing costs at a minimum. The 234(c) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit, or government agency. The program is forgiving if you have not so great credit. A borrower with an FHA loan always pays the same mortgage insurance rate regardless of their credit score. The building must contain at least four dwelling units.

People who are borrowing less than 80% of their home’s value can get a better rate outside of the FHA program. That’s because rates are about one-eighth of a percentage point higher on FHA loans than non-FHA loans. Plus, FHA borrowers must pay mortgage insurance of a half percent each year and an upfront fee 1.5% of the loan amount upon origination. The half a percent a year mortgage insurance fee is about half the price of mortgage insurance on a conventional loan. After five years or when the loan balance reaches 78 percent, the mortgage insurance drops off the monthly payment.

For first time buyers, closing costs are another issue that can be a financial drain; typical closing costs for FHA home loans are around 2% or 3% of the total mortgage. One advantage when taking out an FHA loan? FHA mortgage terms may allow you to build your closing costs into your mortgage. FHA mortgage loans should take up no more than 29% of your monthly income, call me at 310-388-7332 or email me at jamescampbell@coldwellbanker.com and my lender can calculate your percentage of monthly income.

The FHA requires verification of your income and assets with tax returns and pay stubs and a full home appraisal performed by a FHA-certified appraiser to make a loan. If you have had an FHA loan in the last three years you will have to wait to  until 3 years after the loan date to qualify for a new FHA loan. Visit this link for a helpful checklist of information you will need to gather to apply: http://www.fha.com/loan_checklist.cfm

 To see if you qualify for a FHA Condo loan, call me at 310-388-7332 or email at jamescampbell@coldwellbanker.com and I will put you in touch with my lender, he is great!

Many of the features of the FHA Condo Loan, Section 234(c) are similar to those of FHA Single Family Home Loan, Section 203(b).

To be eligible for a FHA Condo loan the condo:

  • The Condominium Building must have 80% of the FHA mortgages in the project as principal residences for owner-occupants.
  • The price of the Condimium must not exceed the FHA Loan limit of $729,750 (the FHA Loan Limit is the same for Single Family Homes and Condominuims)

Check FHA Loan Limits anywhere here: https://entp.hud.gov/idapp/html/hicostlook.cfm

  • The project must be on HUD’s approved condominium list:

https://entp.hud.gov/idapp/html/condolook.cfm

In Los Angeles, there are many condo projects that are not FHA approved. There are a few reasons why this is. The FHA in the past has had low loan limits, so only low priced Condo projects sought approval. Now with FHA loan limits very high ($729,750) as compared to what they were ($362,790), there are a lot of Condo projects that never went through the approval process. Under normal circumstances, the builder would be the one who got a project approved, which would help them to sell the properties. But if the project was outside of the loan limits then there would not have been a reason for the builder to go through the hassle. The second reason that many condo projects in Los Angeles are not approved is that over the past several years there were many other types of financing available that allowed home buyers to purchase a home with as little as $0 down. At the time FHA required 3% down payment. FHA financing was rarely used in Los Angeles because of the easy financing available with these other programs. The lending environment has changed dramatically since then and those easy financing programs are gone now.

If your condominium project isn’t FHA approved, there is a process you can use know as spot approval, to qualify your condominium unit for an FHA Condo loan.

Below are the requirements for Spot Approval.

  • The project must be competed. There should not be any ongoing construction of additional units or common areas.
  • Control of the common areas for the project must have been turned over to the home owners association for at least one year.
  • The home owners association must provide proof of insurance. (Hazard, liability, flood)
  • Individual units in the project must be owned in fee simple or be an eligible leasehold interest. the project’s legal documents must provide for undivided ownership of common areas by unit owners. By virtue of this ownership, unit owners must have the right to use all facilities and unrestricted common elements.
  • The projects documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is generally unacceptable. Such restrictions include rights of first refusal and restrictive covenants. Certain governmental or nonprofit programs designed to assist in the purchase or rental of low-moderate-income housing are exempted from the restrictions on conveyance provisions.
  • At least 90% of the units in the project must have been sold.
  • At least 51% of the units in the project must be owner occupied.
  • No single entity may own more than 10% of the units in the project. “Entity” includes as individual partnership, corporation, limited liability company, limited liability partnership, joint venture, investor group or other natural or legal person qualified to hold an interest in real property. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project.
  • HUD recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small project at a disadvantage, since only a few units will invoke the limit. Accordingly, a two-tiered system was established. For condo projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time. Condo projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages.

 

 

Additional Resources:

http://www.fha.com

 http://www.fha.com/condominium.cfm

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