Orange County homebuyers planning on purchasing a condominium using FHA financing have always needed to make sure the condo project they are looking to buy is in an FHA Approved project. Buyers and Realtors can quickly determine whether a project is approved by visiting the HUD website and typing in a project name or tract number. It is even possible to print out a list of approved projects within a city or zip code. But what happens if a condo project is not on the list? The answer has been to use the FHA Condo Spot Approval Process. The Spot Approval process allowed a lender to close an FHA loan on an individual condo unit within an unapproved complex. However, as of the June 12 release of FHA Mortgagee Letter 2009-19 the Spot Approval is gone.
Why Was the Spot Approval Process Eliminated?
HUD felt that FHA loans were closing on condo's within projects that would not have been approved by FHA. There was a feeling that lenders were "getting one over on FHA". There also has been concern that some complexes have deferred maintenance but are short on reserves and will need to charge a special assessment in the near future.
So What Now?
There is a silver lining. As of this writing there are a lot of condo complexes in Orange County that are not on the FHA Approved list. There hasn't been much incentive for a lender or Realtor to get a project approved when the Spot Approval could be done relatively easy by the lender. Now, in order to close an FHA loan in a non approved project the lender will need to submit a full Condo package to HUD and get the project approved. Once approved, the project will remain on the list for 2 years before needing to be reviewed again. This should help to expand the approved list fairly quickly. In the short run it will mean more work for the lender and maybe a little longer escrow period, say 45 days instead or 30 days (if your Orange County FHA loans aren't closing in 30 days or less then check this out).
What is Needed for Project Approval?
It's really not much different from what was needed for the Spot Approval. A complete CCR package, including the articles of incorporation, bylaws, plat map, budget, reserve study, outstanding or pending litigation analysis, and a special assessment analysis. Also, no more than 30% of the current units can have FHA financing, and at least 50% (it used to be 51%) of the units must be owner occupied.
Don't let these changes scare you away from FHA financing when it comes to a condo. FHA is still the most flexible loan product there is when it comes to down payment (3.5%), where the down payment can come from (gift), and credit (FICO as low as 600). It is just very important to work with a lender or loan officer who has a thorough understanding of FHA.
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