Sept. 1, 2016
The simple answer to this question is: “Yes, but…”
Almost every time I speak with a potential client about FHA (Federal Housing Administration) loans, there seems to be a tremendous amount of misinformation. In fact, even among real estate professionals, many do not fully understand the process. Every day I see a condominium being marketed to potential buyers as qualifying for FHA financing when in reality it does not.
The FHA loan program has been in place since the 1930’s. An FHA loan is obtained through a traditional lender or mortgage broker, and it is “insured” by the FHA. FHA loans have historically been used by first time homebuyers, but these loans are not restricted to just first time homebuyers. Almost anyone can purchase a home with an FHA loan — if they qualify.
Let’s start with the definition of a “condominium” according to the FHA: A “condominium project” refers to a multi-unit property in which persons hold title to individual units and an undivided interest in “Common Elements.” Common elements (areas) include underlying land and buildings, driveways, parking areas, elevators, outside hallways, recreation and landscaped areas and other elements described in the condominium declaration. Common areas are typically managed by a condominium association.
While it is possible to purchase a condominium with an FHA loan, it is important to know the FHA rules on condos to save both time and heartache. The rules for a buyer are quite simple: In order for a buyer to purchase a condominium with an FHA loan, the condominium association/development must be on the list of approved condominium projects. The FHA has made it extremely simple for buyers, sellers, and real estate professionals to determine if the condominium is approved by publishing a searchable list here: https://entp.hud.gov/idapp/html/condlook.cfm
The process for a condo project to be approved is called the HUD Review and Approval Process (HRAP). Typically, the FHA requires the following before approving a condominium project for FHA financing:
-The condominium association must have at least two units. -The association and buildings must have appropriate insurance. -The condominium association/project must meet all state and local requirements and regulations. -Business space in the condominium must not be larger than 25% of the total floor area. -Ownership by investors in the condominium must not exceed 50 percent. (Think rental units) -More than 50% of the units must have been sold prior to FHA approving the first FHA loan. -No more than 15% of the total units can be in arrears on their mandatory condominium assessments and fees. -The property must not be located within a designated coastal barrier (there are interactive maps to find coastal barriers). -Developer “turnover” must have occurred. -Request for approval must be submitted by the builder, developer, condominium association, management company, or designated project consultant or attorney. -Other factors may also impact the FHA decision.
As you can imagine from the list above, the approval process can be a daunting one for many condominium associations and the majority of them never apply for FHA approval. Unfortunately, applications for project approval that come directly from borrowers (buyers), homeowners, sellers, or real estate professionals generally are not processed and are simply returned to the submitter, although these can be addressed on a case-by-case basis, according to HUD.
So if the condominium you want to purchase is not on the approved list, is the answer a solid NO? Not really! There are some lenders out there that are qualified and approved to do what is referred to as a DELRAP. DELRAP stands for Direct Endorsement Lender Review and Approval Process. This means that a lender that has received Direct Endorsement (DE) authority and meets the criteria can process an individual loan for a borrower for a condominium that has not yet been approved through FHA and submit the project for FHA approval through the DELRAP process. Lenders that offer this must meet strict criteria, and many do not offer this. Approval of these loans is never guaranteed, and the DELRAP lender will likely require that the same criteria be met by the condominium association. Once a unit in a project is approved through the DELRAP process, typically the project is approved and viewable on the FHA search tool for future buyers.
If you are considering purchasing a home or condominium with the use of an FHA loan/mortgage, it is important to work with both a real estate professional and lender that have experience with these types of purchases. Our real estate team is happy to meet with you for a free consultation.