FHA announces reset of condominium financing

FHA announces reset of condominium financing

FHA announces reset of condominium financing 

On June 9, the Federal Housing Administration (FHA) announced plans to revise the approval process for individual condo loans. Previously, FHA would only finance a condo if the total complex was FHA approved. Since very few developers or HOAs wanted to go through the approval process, very few FHA loans were made for condos. To help first-time homebuyers, FHA will change its guidelines to allow for individual condos to be qualified, and will begin holding public hearings next month to take opinions on what changes should be made. In the meantime, here is some basic information about the current state of condominium loans:

Although the terms “condo” and “townhouse” are often used interchangeably, there is a difference in the two that can lead to mortgage financing roadblocks when purchasing or refinancing a condo or townhouse.

What is the difference between a condo and a townhouse?

The distinction is a legal one, but it is important: townhouses are deeded from seller to buyer in “fee simple,” which is the same way a regular house is deeded. Condos are deeded “horizontally.”

Why is that?  When you buy a house, you are not actually buying a house, you are buying the land and anything attached (vertically) to the land. But if you are trying to sell a condo in which one unit is above or below another unit, you cannot deed the condo in fee simple (vertically), or one unit would own all the ones above and below it! So to sell a condo, you create a “horizontal property regime” to transfer the units horizontally rather than vertically.

What difference does that make in obtaining a mortgage?

Special rules apply to horizontal property loans that don’t apply to fee simple property loans. A townhouse is treated just like a regular house for loan purposes, but a condo has to meet an entirely different set of rules to qualify for conventional financing. Currently, for FHA financing, the condominium complex must have received FHA approval before FHA will provide financing for an individual unit.

What are some of the rules that apply to conventional loans?

Generally, at least 60–65 percent of the units in a condo project must be owner-occupied units. The homeowner’s association must be under the control of the homeowners and not the developer. No single individual can own more than 10 percent of the units. Many smaller rules also apply, but only to condos, not to townhouses that are being deeded in fee simple.

How can I tell by looking if I am dealing with a condo or a townhouse?

That is the problem—you can’t always tell. However, here is one guideline: if any unit is above or below another unit, it is always a condo (horizontal). If no unit is above or below any other unit, it is probably a townhouse, but you have to check with the seller or realtor to know for sure.

I welcome any comments or questions and can be reached at 864-235-9596 or via email at Mark@TheGreatestRates.com.

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