FHA Spot Approval Requirements for Condominiums

Mortgage and Lending with The Federal Savings Bank

If the condo you wish to purchase with an FHA loan isn't already on their approved list spot approval may be your solution.  Here are the requirments. 

1.   The condominium project must be complete.  There should
      be no ongoing or anticipated addition of any units, common
      elements, and/or facilities

2.   Control of the common areas of the project must have
      been turned over to the unit owners association for at least one

3.   The owners association must provide evidence that the
      project has the appropriate hazard, liability and flood

4.   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.

5.  The project's 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-or moderate-income housing are exempted from
     the restrictions on conveyance provisions.  The Department's
     policy on the free assumability and transferability of
     property is set forth in 24 CFR 234.66.

6.  At least 90% of the units in the project must have been

7.  At least 51% of the units in the project must be owner-

8.  No single entity may own more than 10% of the units in a
  "Entity" includes an 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.

 9. For condominium projects
      having more than 30 units, no more than 10% of the units may
      have FHA insured loans at any given time.  Condominium
      projects consisting of 30 units or less, can have up to 20%
      of the units encumbered by FHA insured mortgages under the
      spot loan rule.

Note: FHA says to obtain a variance from these rules will likely require having the entire building approved for the same variance which is no longer a spot approval.  For more info on FHA insured loan programs click here.

www.MortgageAdvisor.info & www.GregZaccagni.com


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Will Nesbitt
Nesbitt Realty at Condo Alexandria - Alexandria, VA
Nesbitt Realty is a family-run brokerage.

This is an extremely useful article. I'd like to repost it with a link to you at Condo Benefits dot com.

Sep 26, 2008 11:12 PM #1
Greg Zaccagni
The Federal Savings Bank - Wheaton, IL
Illinois Mortgage Lender

Thanks Will:

Learn more about Will and condo benefits here:




Sep 27, 2008 05:04 AM #2
Martin Kalisker
Greater Boston Association of REALTORS - Boston, MA
Professional Standards & Legal Assistant

I have a buyer's agent who is telling me that the lender will not do spot FHA approval if there is pending litigation in the condo complex.  Isn't this a separate issue?

Oct 16, 2008 01:38 AM #3
Chris Peterson

I am a loan broker, and I am being told by the wholesale lender that they will not do a spot FHA approval because the loan amount is in excess of the previous limits (it's in Los Angeles, where FHA loan limits were raised from $362,790 to $625,500).

Is this true???

Apr 29, 2009 05:40 AM #4

in the Chicago area and throughout the nation. A recent FHA mortgageeChicago Illinois FHA condo approval letter detailed the new process that will streamline condo project approval and will open up a lot of properties which up until now have not been eligible for FHA financing. Over the last 2 years condo financing has become increasingly harder with tightening guidelines, restrictive mortgage insurance policies and loan level price adjustments which made condo financing much more expensive for anyone without a big down payment. Over the last 10 years almost all the condos in Chicago were financed with conventional loans and as more and more condo units came on the market through new construction or conversions from rental units, few of these properties applied for FHA project approval. The bright spot for many lower down payment condo buyers was the FHA spot loan. The FHA spot loan approval process allowed home buyers a way to buy units in condo buildings that weren't FHA approved with the better terms that FHA offered (including competitive rates and a low 3.5% down payment), as long as the building met certain guidelines. This has been a great program, and it has helped a lot of new buyers, but there were a lot of otherwise well managed properties which have been excluded from this program. With the new changes, set to take place on October 1st, some of the problems in the program will be fixed and more condo units will now be available for FHA financing.

The FHA spot approval was a great program, but there were some glitches:

  • Any property which had a "right of first refusal" in its Decs and By-laws was automatically rejected.
  • Because of rules regulating how many units in a project could be FHA funded, the condo project had to have at least 5 units. This meant that all the smaller condo units, including a lot of 2 and 3 unit buildings which were converted over to condos during the housing boom, were not eligible for spot loans.
  • The project had to be 90% sold out, meaning only well established properties were eligible, and more recent conversions or new construction condo would not be able to be approved.
  • The spot loan was for a single unit only. If someone else bought in the same building after a spot loan had been approved, they had to go through the same process again.

The new FHA condo approval process changes each of these, meaning more properties will fit the terms and be able to qualify for FHA financing. As of October 1st FHA will do away with the spot approval process and begin the new process. Under the new terms, properties won't be restricted if they have the first right of refusal in their condo docs as long as they don't discriminate, buildings with 2 units and up will be eligible, newer properties will work once they are 51% sold. The approval is not for the individual unit but the project itself, so once approved other units will then be eligible for FHA financing up to maximum concentrations (1 FHA financed unit in buildings of 3 units or less, and up to 30% FHA financed in larger buildings).

One big change in the guidelines is that going forward the approvals will be handled by only FHA direct endorsement lenders (my company is FHA direct endorsed) with "staff knowledge and expertise in reviewing and approving condominium projects". This means that the lender will be responsible for collecting all the documentation needed and putting together the full project approval. This means more paperwork and responsibility for the lender (though this is similar to what is needed for many conventional approvals now), but once the approval is complete the project will be added to the FHA approval list and then any FHA lender or broker will be able to do loans in the building. The company I work for is gearing up for this program by hiring a condo specialist who will work with our underwriters and processors to get these approvals out as quickly and smoothly as possible. I think this will be a big help to the market and will give buyers a lot more selection to choose from.

Here are some of the particulars of the new process taken directly from the mortgagee letter The new rules go into effect on October 1st 2009:

  • Projects consist of two units or more.
  • Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
  • Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.
  • No more than 25 percent of the property's total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
  • No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
  • At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.[1]
  • At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.[2] For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
  • Legal Phasing is permitted for condominium processing. It is recommended that developers submit all known phases for initial project approval. For purposes of calculating the owner-occupancy percentage:
  • a. On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project
  • b. remains the same;
  • c. If multi-phasing includes separate ownership per phase, each phase is calculated individually; or
  • d. Single-phase condominium project approval requests must meet the owner-occupancy percentage requirement.
  • · FHA Concentration
  • a. Projects consisting of three or less units will have no more than one unit encumbered with FHA insurance.
  • b. Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.
  • · Reserve Study - a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old - if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.

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Sep 02, 2009 08:20 AM #5

I am attempting to get a FHA Spot Approval on my Father's unit in a Downtown Chicago Condo Project. The biggest hurdle is trying to determine how many units in the building have FHA Financing on them. The HOA has no idea, HUD has no idea where this info is, I even tried a Data Provider who attemtped to pull Trust Deeds of every unit in the building and to no aveil as they could not pull up half of the units's Trust Deeds. How can I gather this info to finally get what seems lilke should be a simple answer of; How Many Units in this Condo Building have FHA financing on it? Your help is greatly appreciated.


Sep 29, 2009 12:58 PM #6
Katherine Montrose
Long & Foster REALTORS - Chesterfield, VA


Did you ever get a response on how to find out the number of units that were already FHA approved?

Jan 13, 2010 10:29 PM #7
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