FHA Condo Approvals - FHA Concentration Questions
**Update 7/1/2011: HUD has made the temporary 50% FHA concentration limit permanent via Mortgagee Letter 11-22. The following article was written prior to the release of ML11-22**
Recently, I have been fielding questions from HOA's and management companies regarding FHA concentration within a condominium project. HUD has placed the limit on the maximum concentration of FHA loans allowed within a project at 30%. Once this is reached, no new FHA case numbers will be issued until a Unit encumbered by FHA financing is sold.
The first of these questions is:
"If the project already has nearly 30% of the units encumbered by FHA financing, why should we spend the money to get approved or to maintain our approval?"
This would really depend on the condominium project, namely, what their current FHA concentration is and how many units are in the project. For example, if a condominium project has 300 units, 30%, or 90 units, can be encumbered by FHA financing. If 26% of the units are financed with FHA loans, that is only 78 units and 12 more units are allowed.
On the other hand, if a 30 unit project has an FHA concentration of 26%, only one more unit would be allowed to be financed with FHA financing. At this point, it would really be up to the HOA if they wish to proceed. Once the 30% mark is reached, units that are currently financed with FHA financing would have to be sold prior to any new FHA financing can be done within the project.
In the latter case, the final decision would be rendered by the HOA or Board of Directors to proceed with the approval process. What the HOA or Board would need to keep in mind is that processing time for approvals are about 4-6 weeks. So if an FHA buyer is attempting to purchase a unit in a non-approved complex, the buyer would have to wait 4-6 weeks for approval through HUD and then approximately another 4-6 weeks for loan processing through a broker or lender.
The second question is on the other end of the spectrum:
"If the project has a very low FHA concentration currently, what is the benefit to acquiring or maintaining an approval with HUD?"
Over the past several years, home loan financing has changed a great deal, as most people well know. Financing for condominium units have become stricter and it is much more difficult to come by. So, even though, historically, the project has seen little use of the FHA loan programs, this can be expected to change as FHA is continuing to increase its market share. Incidentally, this is exactly why HUD overhauled their approved condo list.
I have also heard rumblings that conventional financing through Fannie Mae and Freddie Mac could be regressing to require a 20% down payment for purchase transactions. I don't know if this will ever happen, but it would surely make the availability of FHA financing in a condo project absolutely necessary.
The other side of this is that Fannie Mae and Freddie Mac also have a 30% concentration limit within a condo project. Aside from Fannie, Freddie and FHA, obtaining financing for condos is almost nonexistent. Without HUD's approval, buyers would be limited to Fannie and Freddie financing which could only finance up to 60% of the units. At present, there is no way to determine what Fannie's or Freddie's concentration is in any given project. Fannie and Freddie also maintain their own condo project approval lists that are not available to the public.
For projects located in "Rural" areas as deemed by the USDA Rural Development loan program, the USDA uses the HUD approved condominium list to determine eligibility for this type of financing but doesn't pay attention to the FHA loan concentration. I am certain that it goes without saying that the FHA loan program and the USDA RD program function independently aside from them both relying on the HUD approved condominium list.
[Please note that for those in Connecticut, the CHFA housing program runs on the HUD list and uses an FHA loan for the first mortgage.]