FHA has once again removed the ability to do an FHA spot approval on condominium purchases. They seem to have gone back and forth over the past year. They took it away, brought it back and took it away again.
Here is one of the excerpts from a 2009 Mortgagee Letter from the Department of Housing and Urban Development:
"“Spot Loan” Approval Process
Mortgagee Letter 2009-46B eliminated the Spot Loan Approval Process as defined in Mortgagee Letter 1996-41 for all FHA case number assignments effective on or after December 7, 2009. However, to address concerns involving the volatility in the condominium market, the new effective date for the elimination of this practice is for all FHA case number assignments on or after February 1, 2010. FHA may perform additional monitoring to ensure compliance with the “Spot Loan” Approval Process."
That is just one tiny little paragraph in a lengthy letter regarding FHA changes for condominium purchases. It would be difficult to write all of the new changes for FHA loans in condos, but suffice it to say that it will be difficult to get an FHA loan on a condo that is located in a complex that is not already approved for FHA financing.
To attempt to get an entire complex approved for FHA financing will now be a very lengthy and arduous process. Another new rule states that even if a condo complex gets FHA approval, only 30% of units will be eligible for FHA financing. On a small complex it's almost not worth it. For example, in a complex of 10 units, only 3 would be eligible for FHA financing. Small complexes will not want to spend the money required for FHA approval nor the paperwork and time necessary to get approval.
I have a beautiful Orland Park condo for sale. The seller purchased the unit with FHA financing by getting FHA spot approval for the unit. He didn't understand why I could not promote his place as FHA approved. I did a lot of investigating and I found out that with his association, it would have been almost impossible to do on his unit.
The interesting thing is that his large complex has multiple associations and some buildings were able to do spot approvals as they were willing to comply with FHA rules. His association made it difficult. Now none of those units will be FHA approved unless each association goes through the rigors of getting approved. I can't see that happening.
I just had a buyer that insisted we only view true townhomes because she would have to put down more money if she purchased a condominium. Many mortgage companies consider condominiums a financial risk and they are tightening lending on them. This does not bode well for condominum owners. It will be more difficult to sell and for truly motivated condo sellers, prices will continue to decrease.