In order to purchase a condo with an FHA loan, the condo association that runs the condos needs to be approved by HUD. That sounds easy enough, but it is a process that is hard to come by, especially in the wake of the mortgage crisis. In fact, thousands of condos that were once approved are no longer approved as all approved status was removed in 2010, forcing condo associations to reapply. This process is not an easy or inexpensive process to go through, which has left a majority of condo associations unapproved. In turn, this means that sellers are out of luck and buyers are having a hard time finding financing for housing that they can afford.
What is Spot Approval?
Spot approval is something that took place several years ago, but has stopped in recent years. It is the process of getting one single condo approved for the sake of financing rather than the entire association. The FHA is considering bringing this type of approval back, which could be a game changer for the mortgage industry. Right now, people looking to purchase a condo need to be able to qualify for conventional financing. Even with the new Fannie 97 LTV loan available, it has not helped the market as much. People still need to have great credit, plenty of assets, and a low debt-to-income ratio. This is not always the case for those looking for a condo. Without the ability to take advantage of the leniency of the FHA loan, many buyers are out of luck.
This trend has left many sellers stuck with a home they want to sell. Without the ability to sell to the FHA market, they are forced to lower their price until they can find a buyer that can afford the home and qualify for conventional financing – not an easy combination to find. With spot approval, however, more FHA loans will be available, which means condos will sell faster and for more money. This could be a good thing for the economy as a whole as more condos move, more money exchanges hands, and values continue to increase.
What will it Entail?
No one knows just yet what the spot process will require. In the past, it was rather simple to get through, simply requiring a questionnaire that almost anyone could have fraudulently completed. The prediction is that the new process will be more secure, requiring more questions and concrete ways to get those answers so that there is a lower risk of default on an already risky loan. Condos already pose quite the danger to lenders, which is why allowing the spot approval to come back could be a risky situation.
The decision is still not made whether spot approvals will make a comeback or not. If they do, it could be a great way to enhance the ability for condos to sell, allowing many people to afford them that otherwise would be unable to. FHA financing offers many benefits including a low down payment of 3.5%, low credit requirements, flexible debt-to-income ratio requirements, and the possibility of having funds gifted for closing costs and down payment money. If the FHA has their way, this will become reality, allowing condo sales everywhere to increase and many people to become homeowners that have never had the luxury due to the issues with condos being approved by HUD.
Don’t give up hope just yet that the spot approval process will not go through – it may take some time, but chances are we will see it again someday soon.