Single Unit or Full FHA Approval?

When HUD releases the new Single Unit Approval program, which will allow FHA lending in communities that are not HUD approved, many associations are going to be faced with this decision: To approve or not to approve.

The real estate and mortgage industry will most certainly opt for the path of least resistance in Single Unit Approval, and understandably so. They won’t have to wait for the board to meet and vote, or involve property managers who would rather not be bothered with the work of a full HRAP submission. Why elect the manner of approval that costs more and takes longer when there is a better and quicker option? Lenders, agents, buyers, sellers, and refinancing owners will only choose full approval when it is required, such as with 2-4 unit properties or manufactured housing.

For condominium associations, the choice is not as clear. Cost is usually not a factor for the average condominium association that has ninety units or more. For a reasonable cost per unit, you can have a project consultant firm process the submission. But there are two benefits to full approval that a prudent association must consider.

First, a full project approval lets the entire real estate world know that a particular association has been vetted by HUD and appears on its approved roster. This certainty is critical to the resale market within a given community. Single Unit doesn’t approve the association, only the particular borrower’s loan in conjunction with underwriting the association and it’s governing documents and current financial condition. Consequently, it’s anyone’s guess as to whether an unapproved association is actually eligible for FHA financing under the impending Single Unit guidelines.

Furthermore, when a condominium has full approval, 50% of the units within the association may have FHA mortgages, whereas under the Single Unit Approval, FHA mortgages are expected to be capped at between ten and twenty percent. Once this threshold is reached, full approval will be a requirement.

There are of course some associations that have only full project approval as an option. Condominium associations from 2-4 units, manufactured housing condominiums, and any association that has had an adverse finding by HUD will have no other option but to go through and HRAP or DELRAP approval.

Some associations would be wise to rely on Single Unit Approvals when trying to fund an FHA mortgage within the association. Small unit associations that have few opportunities for sales or refinance, and high-end vertical condominium associations with sale prices above the maximum FHA loan limits, will find the Single Unit Approval option the most efficient and cost effective. Regardless of what approval process is chosen, one thing is certain. FHA insured lending is going to be increasing in condominiums.

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