Buying an affordable home just got a little easier.
The Federal Housing Administration recently announced new changes that will make it easier to get an FHA loan when buying a condo. This will help first-time buyers with limited down payment funds and those with less-than-perfect credit — groups who often rely on FHA’s mortgage insurance program and are looking for affordable housing options like condos.
“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families and it’s critical that FHA be there to help them,” said U.S. Housing and Urban Development Secretary Ben Carson in a press release announcing the changes. “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.”
Unlike detached homes, FHA required entire developments to be certified before allowing buyers to get an FHA-insured mortgage on a condo. This was particularly problematic since very few developments are certified, which resulted in many condo units not qualifying for an FHA mortgage. Of the more than 150,000 condominium developments in the U.S., only 6.5% are approved, according to FHA.
This often hurts first-time homebuyers who look to condos and FHA loans as a way to make the jump into homeownership. In fact, FHA reports that the vast majority, 84%, of its condo buyers have never previously owned a home.
“Condos are typically more affordable than a detached single-family home, but only a small fraction of condos are FHA-certified,” said Lawrence Yun, chief economist of the National Association of Realtors.
That will change under the new announcement, which will expand the pool of properties that can have an FHA loan. Key changes include 1) extending FHA certifications from two years to three, 2) allowing individual units to receive an FHA loan even if the entire project isn’t certified, 3) providing more flexibility with the owner-occupancy ratios in a development and 4) increasing the number of FHA loans allowed in a project.
“Today we are making certain FHA responds to what the market is telling us,” said HUD Acting Deputy Secretary and FHA Commissioner Brian Montgomery in a press release. “This new rule allows FHA to meet its core mission to support eligible borrowers who are ready for homeownership and are most likely to enter the market with the purchase of a condominium.”
In fact, FHA predicts the new policy will increase the number of FHA-eligible properties by 20,000 to 60,000 condo units. The changes become effective Oct. 15.
Specifically, FHA has created a new single-unit approval process to make it easier for individual condo units to be eligible if located in a completed project that isn’t certified. For developments with more than 10 units, up to 10% can be FHA-insured. That number drops to two for projects with fewer than 10 units.
The rules allow 50% of the units to have FHA loans. Additionally, 50% of the units must be occupied by owners, not renters, for most projects.
Finally, the changes will also support more mixed-used developments. Of a project’s total square footage, 35% can be used for commercial or nonresidential space.
The policy updates are important to Utah home buyers who rely on a variety of housing types to meet their needs. For buyers shopping at lower price points, condos and attached homes are an important affordable housing option.
For example, the median price of a single-family detached home in Utah is $330,000 while an attached home, such as a condo or townhome, is only $241,000, according to data from the Utah Association of Realtors.