FHA Loans – Changing Regulation Limits Opportunities

January 20, 2010

There is an important change just going into effect regarding FHA loans:  “Spot Approvals” are going away February 1. A Spot Approval is when a lender can approve and fund a loan on a specific unit in any condo building provided the building meets certain conditions (building is 4 units or greater, 90% of units sold, 51% owner-occupied, no more than 20% commercial space, healthy condo budget, etc.).

Loans insured by the Federal Housing Administration (or “FHA loans”) are just about the only loans available to buyers with less than 10% down.  FHA loans may be used to purchase both single family homes and condominiums, provided the condominium project is approved by HUD for this type of financing.

An FHA Spot Approval is key for buyers because it means the buyer has lots of inventory to choose from. As of February 1, HUD is eliminating Spot Approvals, meaning an entire building must be approved by HUD directly or by a lender directly. Because of fraud liability and risk issues, most lenders are not approving whole buildings and deferring to the HUD-direct approval method.

Now, you are probably wondering – how does this affect me?

Good news first:  FHA loans top out at $729k, so if the property you are buying or selling is priced above about $800k, this will not affect you at all.  If you are a buyer with more than 10% down, this might be good for you as competition from FHA buyers will be virtually eliminated.

And now the bad news:  If you are a buyer with less than 10% down, planning to use an FHA insured loan, this means that you will have less inventory to choose from OR a very long waiting period in escrow that might make an offer from you less attractive than one without the waiting period.  For example, in all of San Francisco, there are only 27 FHA-approved condo projects currently approved! **

Just a bit more (bad news):  If you are a seller, the buyer pool will be constrained to those with more than 10% down who don’t need to use the FHA program OR you will need to cooperate in a long approval process for your building to qualify for the loan.  I would not advise trying to qualify in advance of accepting an offer as the process is time consuming.  However, I would advise that you and your agent take a really critical look at whoever’s handling the loan for the buyer as all mortgage professionals are not created equal.  If you are interested in taking a look at the criteria for becoming FHA approved, just let me know!

**Why are there so few, you ask?  Well, one reason is that prior to last year, FHA loans were not available above $417k, so most buildings just didn’t bother.  Now, with the higher loan limit of $729k, FHA loans are a relevant part of our market.  If you have good credit and at least 3.5% down, you may be able to buy a home using this program.  If you are interested in finding out more – just ask, of course!