Tag Archives: Single Unit Approval

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.

There will be a lot of Conventional crossover to FHA when Single Unit Approval Starts

HUD should implement Single Unit Approval, formerly known as “Spot Approval”, within the next couple months.  This landmark condominium program is going to be a lifesaver to those current FHA buyers who cannot find a suitable condominium to purchase, because so few of the associations in the country are FHA certified, there is no inventory.  An unintended consequence of this program will be crossover from Conventional loans into FHA Single Unit Approved loans.  Here’s why.

Single Unit Approval allows for condominium lending in almost all condominium associations, subject to a few limitations, without the community having to go through the process, cost, and delay of full project approval by HUD.

The most notable difference between an FHA and Conventional loan, is the fact that an FHA loan has a one-time, Up Front Mortgage Insurance Premium (UFMIP), which comes out to 1.75% of the loan amount and is added to the mortgage balance.   This adds about $3200 to the average loan, and is definitely the downside to using an FHA mortgage.

However, when the rest of the components of a mortgage payment are examined, FHA becomes the clear choice.  First, the monthly mortgage insurance on a Conventional loan is higher than it is on an FHA loan, and will be a lot higher if the mortgage insurance cut authorized by Obama is reinstituted.  Additionally, the rates are higher on a Conventional 97, than on an FHA mortgage, by about 35 basis points.  Many times this difference is made worse by Conventional lenders who have hits to the rate for the property being a condominium.  These not to mention the adjustments to the rate that Conventional lenders have for borrowers without the highest credit score.  Add to this the fact that the FHA mortgage is assumable, and only someone dead from the neck up wouldn’t choose an FHA.

So Conventional lenders, prepare yourselves.  In the ensuing years, you’re going to be doing a lot of comparisons of FHA loans to Conventional loans in condominiums to show your borrowers what the best choice is.  Choice is a good thing, and when buying a house, the more of it you have the better the experience and outcome you can expect.  And you can thank the Single Unit Approval and your Congress for that.