The Significance of FHA Approval for Condominiums

By Daniel Duffield

With many borrowers unable to qualify for home purchase loans, an increasing number of buyers have turned to condominium purchase. With amenities, regular maintenance, and inherent security, condominiums have many advantages over typical home purchases; however, regardless of how a borrower funds a condo purchase, he or she should consider FHA-approval status when selecting the right condominium.

   

Rise of the FHA

In the last several years, the Federal Housing Administration (FHA) has claimed more and more of the mortgage market, picking up the slack left by the elimination of the sub-prime mortgage market. In 2010, statistics indicated that 40% of all newly originated mortgages were insured by the FHA, growing substantially from former levels and becoming one of the most popular among first time homebuyers. With such dominance of the mortgage market and so many property purchases being funded by FHA loans, this organization has a significant influence over the condominium demand and value.

FHA Approved Condominiums

With a vast majority of first time homebuyers funding their purchases through the FHA, FHA condominium approval has become a kind of commodity, especially in terms of condominiums; in order for a borrower to purchase a condo with an FHA loan, the condominium must be a part of a condo project which has received approval by the Federal Housing Administration. While the requirements for FHA condo approval are not exceptionally stringent, it does include a small fee, which many condo project managers are unwilling to pay.

FHA Condo Demand and Value

As previously mentioned, approval for FHA condominiums represents a commodity which adds value to the condo or lessens the value in the absence of approval. For instance, due to the expense of homeownership, many first time buyers choose to purchase condominiums. These buyers generally cannot afford the sizeable down payments which conventional loans require (especially in order to avoid paying for mortgage insurance); consequently, many condominium buyers secure FHA loans for 96.5% financing for a 3.5% down payment, one of the smallest available.

Accordingly, a condominium which does not have FHA approval severely limits the amount of borrowers who will be willing and eligible to purchase the property. With significantly less buyers, the condominium will most likely not be able to sell for its total asking price. Furthermore, even borrowers purchasing condominiums with conventional loans or other non-FHA loans will benefit from FHA approval, as it makes the property much easier to sell when necessary. Therefore, the value of condominiums decrease without FHA approval, as sale becomes much more challenging. Essentially, this phenomenon embodies the basic principles of supply, demand, and price; with a significantly reduced demand and a stable supply of FHA-approved condos, the price of non-FHA condominiums decreases noticeably.

The Bottom Line

If you are purchasing a condominium, ensure that the project has obtained FHA approval, as this will not only make the property easier to purchase but lessen the difficulty of selling it, thereby increasing its overall value and the profitability of the purchase.

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