Exciting news for Florida condo buyers!
New rules just went into effect on October 15, 2019 for buyers wanting to purchase a condo with FHA financing. This is wonderful news for first time buyers, as nationally, 84% of condos purchased with FHA financing were bought by first time buyers... But that hasn’t been the case here in South Florida, as the majority of condos here in the South East have not been eligible for FHA financing since the Great Recession, which began in December 2007.
When I started in Real Estate back in 1998, I sold lots of condos to first time buyers using FHA financing. It was wonderful for young people just starting out, as they could buy an inexpensive property with just 3% down. FHA down payments now range from 3 ½ - 10% depending on the buyer’s credit score. After the Great Recession, many condos ran into big problems. People fell delinquent on their condo association payments, rental complexes were converting to condominiums and Investors who had bought up 10 & 20 condo units just stopped paying the condo dues and let the units go into foreclosure. This is why many condos in Florida don’t allow renting or have strict rules on investors purchasing units and renting them out right away. Many condos require owner occupants only or require buyers to own the unit for a year or even 2-3 years before renting them out.
Condos stopped renewing or applying for FHA approval, and if you went to HUD’s website to search for FHA approved condos in South Florida, you’d pretty much come up empty. This is still the case, but now that HUD has revised their rules on FHA backed condos as of October 15, 2019, hopefully more condos will start applying for FHA approval again.
In the meantime, the new rules allow for some condos to be eligible for FHA financing, even if the condo project isn’t on HUD’s FHA approved list! This used to be known as a spot approval, but FHA spot approvals have become pretty much non-existent… until now… now FHA is allowing what they call a single unit approval process.
Summarizing the 124 page document on FHA Project Approval for Single Family Condominiums and 1081 page FHA Handbook that was updated on October 15th, the main points are as follows:
1. The name “Single Family Condominiums” refers to one-family units located in a multifamily building (condo).
2. Lenders must follow rules under the Direct Endorsement Lender Review and Approval Process (DELRAP)
3. The condo must be purchased by a buyer intending to be an owner occupant.
4. The condominium must show financial stability. In Florida, one of the biggest stumbling blocks for financing condos is whether the condo has 10% of it’s yearly budget set aside for reserves. This is still a requirement for FHA approval, and many condos don’t have reserves set aside. The condominium must keep separate accounts for operating expenses and reserve funds.
5. FHA used to limit the amount of commercial space in a condo to 25-35%. They have increased this to 49%. We don’t have a lot of buildings falling into this category here in Broward County, but there are probably more in the downtown Miami area. Garage parking used to be considered commercial. They’ve changed this and now the garage parking is considered residential.
6. FHA used to require at least 50% of units in a building to be owner occupied. They’ve reduced this to 35%. So if a building has a lot of investor owned units, this should help.
7. No single owner or investor can own more than 10% of the units in a building (Individual Owner Concentration). For buildings with less than 20 units, no single owner or investor may own more than 1 unit.
8. No more than 15% of the units in a condominium project can be in arrears (no more than 60 days late on condo association dues).
9. The condominium must carry master insurance policies, both for hazard and liability insurance. Fidelity insurance must be in effect for officers, directors and employees of condos with more than 20 units. Flood insurance is required if the condo is in a flood zone.
10. The condominium can not be subject to any current litigation that relates to safety, structural soundness, habitability, functional use, or any other litigation that would not be covered by insurance.
11. There are additional requirements – such as new buildings must be at least 1 year old. The condominium must have at least 5 units. Manufactured homes do not qualify. Co-ops do not qualify. Condo Hotels do not qualify.
*** The biggest obstacle I see with these new rules is there can only be 10% FHA Concentration in a condominium. This means for the new single unit approvals, if more than 10% of the units were purchased with FHA financing, they won’t be approved. I sincerely hope HUD will rethink this rule. The National Association of Realtors will be doing their best to influence HUD on this rule, as it doesn’t make sense. Everyone wants the American dream of home ownership. Why limit the number of FHA loans in a building! Hopefully as condos approach the 10% FHA concentration, they will apply to be an FHA Approved Condo. Condos that have gone through the process to become FHA approved can have up to 50% FHA concentration.
Many condominium boards did not feel it was worthwhile to apply for FHA approval, as the process could take up to 6 months and was only good for 2 years. The approvals are now good for 3 years, with a 6 month grace period for renewing. And the renewal process is supposed to be much easier now, only requiring an updated re-submission package rather than a whole new certification.
I will personally be going out and talking with Condo Association Board Members, trying to persuade them to apply for FHA approval. In the meantime, I hope to see more first time buyers and people relocating to Florida taking advantage of this new opportunity. If you have questions or would like help buying a condo, please feel free to give me a call! ~Debbie Bates, Coral Shores Realty (954)557-7036 / debbie@SouthFLHomes.com.
Sources: FHA Single Family Housing Policy Handbook 4000.1 with new sections: Section II.A.8p Condominiums and Section II.C Condominium Project Approval, pages 477-496 & 510-537.