New FHA Rules Could Make It Tougher to Get a Loan, Easier to Buy a Condo

This year, there have been two important guideline changes from the Federal Housing Administration (FHA). Earlier in the year, the FHA issued an update to their low credit score guidelines. (1) In August, new guidelines were announced to streamline the approval process of condominium projects. (2)

The low credit score guidelines are intended to reduce risk for the FHA, while the condo project approval process guidelines are intended to help address the affordable housing crisis.

First, I’ll review what is included in the guidelines, followed by thoughts on what these two updates could mean for homebuyers and investors.

FHA Introduces New Guidelines

Low Credit Score Guidelines

The FHA took steps to reduce their risk by updating the underwriting guidelines for borrowers with both lower credit scores and higher debt-to-income ratios. The new guidelines require a manual underwriting of loans to borrowers who have scores under 620 and a total debt-to-income ratio over 43 percent. These new, stricter guidelines became effective March 18, 2019.

Homebuyers applying for FHA loans who fall into this higher risk category can expect more loan denials. This will impact not only the individual buyer, but will also have a negative impact on the affordable housing crisis, as fewer buyers will be able to take out loans to purchase a home.

Investors in long-term rental properties should benefit from this change, as it will keep more potential home buyers in the rental pool and boost the demand for rental properties and prices.

This guideline change may also have a positive long-term impact on the real estate market by reducing defaults.

Condominium Approval Process Guidelines

In August, the FHA issued a new condominium approval rule. The rule and associated guidelines, effective October 15, are set forth in the FHA’s Condominium Project Approval section of the Single-Family Housing Policy Handbook. (3) They are part of a broader condominium rule that seeks to reduce regulatory barriers that currently restrict affordable home ownership opportunities.

Included in the new FHA rule are requirements for Condominium Project Approvals and Single-Unit Approvals, as documented in the handbook. A summary of the key requirements is provided below.

Condominium Project Approvals

The important requirements for units in approved condominium projects are:

Owner Occupancy: The approved condominium project must have an owner occupancy percentage of at least 35 percent of the total number of units.
FHA Insurance Concentration: The FHA will allow a maximum of 50 percent of the units within a condominium project to be FHA insured.
Individual Owner Concentration: For condominium projects with 20 or more units, the individual owner concentration must be 10 percent or less. For condominium projects with fewer than 20 units, the unit owner may not own more than one unit. In addition, no related party may own a unit.

Single Unit Approvals

An important update to the rule allows for certain individual condominium units to be eligible for FHA mortgage insurance, even if the condominium project is not FHA approved. Individual units may be eligible if they meet the following criteria:

The unit is in a completed project that is not FHA approved
No more than 10 percent of the units are FHA insured (projects with 10 or more units)
No more than 2 units are FHA approved (projects with fewer than 10 units)

Additional requirements for Single Unit Approvals include:

Owner Occupancy: The condominium project must have an owner occupancy percentage of at least 50 percent of the total number of units.
FHA Insurance Concentration: FHA insurance concentration is not to exceed 10 percent of the total number of units in the condominium project.
Individual Owner Concentration: For condominium projects with 20 or more units, the individual owner concentration must be 10 percent or less. For condominium projects with fewer than 20 units, the unit owner may not own more than one unit. In addition, no related party may own a unit.
Commercial/Non-Residential Space Limits: The condominium project’s commercial/non-residential space cannot exceed 35 percent of project’s total floor area.

How Changes Will Impact Homebuyers and Investors

This could bode well for both buyers and investors. There will be more affordable housing for buyers and more opportunity to invest in multifamily units. Condos are often the entry point for first-time buyers, and these new guidelines would increase access to FHA financing for more first-time buyers. Add to this the expected surge of millennials entering the home-buying market, and we should see a strong market for multifamily property investments.

For home buyers, these changes should have a positive impact by adding inventory and make more housing units available to choose from with FHA financing. According to the HUD press release, it is estimated that 20,000 to 60,000 condominium units could become eligible for FHA-insured financing annually, as a result of FHA’s new policy.

For investors, these changes present more opportunities for multifamily investments. There will be more projects coming online, and there will also be high demand for these units, due to the lower price of condo units and low down-payment requirement of FHA loans.

References: