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.

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