FHA Condo Approvals – New Construction FHA vs Fannie

I received an email via Activerain two days ago from a developer looking for information regarding his proposed condominium project and asked what the difference is between a HUD approval and a Fannie Mae approval.

Here is what I wrote back to him:

There is a big difference; they are separate loan programs, first off. Fannie and Freddie financing programs are stricter and require larger down payments; they are referred to as “conventional” loans. FHA loans are government loans and have more lax criteria for approval and smaller down payments.

The processes and costs are also different. There is no cost to apply with HUD for an approval. There can be a substantial cost to apply with Fannie Mae depending on the number of units.

In my understanding, there is no real need to get approved with Fannie Mae, which costs $1200 plus $50 per unit, last I checked. What this will do is get the project on Fannie’s approved condominium list. However, if the project is not on Fannie’s list, the lender who is underwriting the loan MAY (not always) ask for a full project review. This entails supplying paperwork to the lender so that it can determine whether or not it is within the risk tolerance. Each lender will have to do this but on your end, once you have assembled the paperwork the first time, it would simply be a matter of supplying the same paperwork each time, if necessary.

However, the project MUST get approved with HUD for FHA loans to be available in the project. HUD maintains an approved condominiums list and if the project is not on that list, FHA loans are not available in that project.

This is important because a very large percentage of condominium purchases are with FHA loans. These loans offer less down payment and more lenient credit-qualifying requirements, both of which make it easier for potential buyers. Being on the HUD list could be the single most important factor in being able to sell units.

In addition, Fannie Mae only allows a 30% concentration of Fannie loans in a project. Freddie Mac has the same requirement. However, HUD allows for up to 50% concentration for FHA loans (and up to 100% after the project is complete for 1 year and the voting control has transferred to the unit owners). Therefore, without HUD approval, you could sell 60% of the units with conventional financing and the other 40% would have to be cash buyers or must arrange financing through a local bank or niche lender.

Most important to the developer is the presale requirements of the two, that is, the number of units which must be sold in the project prior to FHA, Fannie or Freddie financing may be used.

Fannie and Freddie have a 70% presale requirement (51% in some instances). This means that before conventional financing may be used in this new development, 70% of the units must be sold first.

HUD’s presale requirement is only 30%, which means that FHA financing could be utilized after selling only the first 30% of the units.

Another point that your developer would be interested in is the concept of legal phasing as a strategy.

Let’s say that the total number of units in the project will be 100. According to the presale requirements above, 30 units would have to be sold prior to FHA loans being available and 70 units would have to be sold before Fannie/Freddie loans are available.

However, if the developer breaks it down into 10 legal phases of 10 units each, only 3 units would have to be sold prior to the first FHA loan. Each time an additional legal phase is completed, the presale requirement will already be met.

NOTE: Legal phases are different than “marketing” phases and must be included in the legal documents. If the Declaration calls for all 100 units in one phase, then it is not legally phased.