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New FHA Condo Rules Open More Affordable Homeownership

Front of Condo Buildings

The Department of Housing and Urban Development (HUD) made a federal ruling that allows the FHA to insure loans for single-family units in a multifamily project, such as a condominium. These new FHA condo rules aim to provide more options for affordable and sustainable housing among credit-worthy, first-time homebuyers.

What this means is that eligible borrowers will be able to receive FHA-insured loans for the purchase of a condo. This rule applies to specific individual units, even when the unit is located within a condo project that is not FHA approved. According to the ruling, no more than 10% of individual condo units within a condo project may be FHA-insured. For condo projects with less than ten units, there is a maximum of two FHA-insured units.

These new rules make homeownership more accessible and provide individual condo units as an affordable option. Historically, condos have been an inexpensive housing option but needed FHA approval of the entire condo project to be eligible for FHA-insured loans. Only 6.5% of the 150,000 condo projects are approved to participate in the FHA’s mortgage insurance program. Estimates suggest that 20,000-60,000 condo units could become eligible for FHA-insured financing annually, opening up many options for affordable homeownership each year.

Not only are condos a more affordable option, but they are becoming increasingly more popular as well. This popularity is particularly evident among first-time homeowners. Of those that purchased condos with FHA-insured loans, 84% were first-time homebuyers. 

What are FHA-insured loans?

The FHA is the Federal Housing Administration. FHA-insured loans are a type of federal assistance for lower-income Americans to aid in borrowing money to purchase a home they would otherwise be unable to afford. 

The FHA does not issue loans, but only provides insurance to private lenders. Those who qualify for FHA-insured loans are typically a higher risk to lenders. To shield lenders from some of this risk, the FHA requires two-part mortgage insurance to be paid by the borrower. The first part of mortgage insurance is an upfront bulk payment of 1.75% of the loan usually financed by the lender and rolled into the mortgage. The second part of the mortgage insurance is a monthly mortgage insurance premium which varies based on the term of the loan.

To remove the monthly mortgage insurance premium, borrowers must satisfy one of two requirements. Borrowers must either obtain 20% equity in the home and then refinance their loan, or obtain 22% equity, upon which the premium will be removed automatically.

Who qualifies for FHA-insured loans?

While the FHA uses many metrics to evaluate who qualifies for FHA-insured mortgages, one of the primary parameters is their FICO credit score. The FHA also uses credit score as a guide for eligibility and terms of loans. FHA loans are helpful for those with a bad, or recovering, credit score who may not qualify for a loan from private lenders otherwise.

The FHA requires a credit score of 580 to qualify for a mortgage with 3.5% down payment and a credit score of 500 to be eligible for a mortgage with 10% down payment. Other factors the FHA takes into consideration when establishing eligibility include payment history on other debts and more.

In 2017, 46% of first-time homebuyers used an FHA-insured loan on their first home. The home must be owner-occupied to qualify for an FHA-insured loan. This requirement implies that an individual will not be able to be eligible for more than one FHA-insured loan at a time. Although, having multiple consecutive FHA-insured loans throughout a lifetime is acceptable.

What do the new FHA condo rules mean?

This new FHA ruling is a step forward in matching where the housing market is headed and providing an avenue towards affordable, sustainable options for future homeowners. By offering FHA-insured loans for the purchase of a single condo unit, more Americans can achieve their dream of homeownership.