FHA Spot Approval

Understanding FHA Spot Approval: Condominium Eligibility Process Explained

For the past 15 years, if you were looking to purchase a condo using FHA insured financing, the entire condo development needed to be FHA approved. However, exceptions can be made to secure a “spot approval” for a single condo unit within that development

One of the recent challenges for condominiums has been the increase in investor purchases of condos and also increases in condo insurance. Both of these factors could prevent a condominium project from being FHA approved.

Effective August 15, 2019, the FHA revised their guidelines on condo approvals in Section II.A.8.p “Condominiums” and Section II.C “Condominium Project Approval” of the FHA handbook.

The FHA Spot Approval is the key for securing a loan for a condominium that’s not part of an FHA-approved development. This opens up access to more housing possibilities, even within communities that haven’t achieved full FHA approval. However, to be eligible for spot approval, the individual condo unit has to meet certain standards prior to approval.

An FHA spot approval allows individual units within a condominium project to be approved for FHA financing, even if the entire project is not FHA-approved. This can be beneficial for buyers looking to use an FHA loan for a specific unit in a non-FHA-approved condominium project. Keep in mind that spot approvals may be subject to specific criteria and guidelines set forth by the FHA.

Bill Gassett, owner of Maximum Real Estate Exposure told me he has been involved in a few spot approvals as a real estate agent. Bill says:

“Eric, I have sold a few condos where a spot approval was needed due to the community needing authorization. There are a few things potential buyers should research right away.

The financial health of the neighborhood is the top priority. The condo project’s financials must be scrutinized to ensure there are adequate reserves, insurance coverage, and a healthy budget.

There also cannot be a large percentage of rentals as this needs to be looked at favorably. A real estate attorney should also verify that there is no pending litigation against the association. All of these items will preclude a borrower from getting an FHA spot approval.

For many borrowers, getting a spot approval could be a worthwhile effort. Some communities without an FHA approval are excellent places to call home. I would work with a mortgage lender with experience in expeditiously getting spot approvals.”

What is an FHA Spot Approval?

The concept of a spot approval unlocks opportunities for homebuyers seeking to use an FHA loan to purchase a unit in a condominium community not approved by the FHA as a whole. This means that even if the entire condominium development isn’t FHA-approved, individual units within it can still be considered for FHA financing. Such flexibility significantly broadens the pool of available housing options for potential buyers who prefer or require FHA financing.

By allowing individual units within non-FHA approved condominiums to be eligible for FHA loans, spot approvals provide a workaround for potential buyers who may have otherwise been limited in their housing choices. This is particularly helpful in areas with numerous condominiums not already FHA-approved. Securing an FHA loan for a non-FHA approved condominium unit offers relief and expanded opportunities for buyers who may not qualify for conventional financing or cannot find an FHA-approved property that meets their needs.

Additionally, spot approval can be especially beneficial in competitive housing markets where limited inventory may make it difficult for potential buyers to find suitable housing that meets their specific lifestyle and financial needs. It allows individuals to consider a wider range of options and potentially find the perfect home, even if it’s located within a non-FHA approved condominium development.

Eligibility Rules for Spot Approvals

There are strict guidelines that need to be met for a condo to be eligible for a spot approval. This is a list of eligibility criteria that must be met:

  • The single unit condo for which you would like to secure a spot approval must be within a condominium project that is not already FHA approved.
  • The single unit must be habitable, have a certificate of occupancy, and must pass the FHA inspection.
  • The project must have a minimum of 5 condos and they cannot be manufactured. This means no pre-fab or mobile home type of construction.
  • The project must meet owner occupancy requirements.
  • The project must meet the FHA insurance concentration requirements.
  • The project must demonstrate financial stability.

These are the major factors which will determine whether a condo can receive an FHA spot approval. Now, we will discuss a few of them in detail.

Owner-Occupancy Percentage

One of the primary eligibility requirements for spot approval is the percentage of owner-occupied units within the condominium project. The requirement is for at least 50% of the units to be owner-occupied. Owner-occupancy demonstrates stability and investment in the community, which is favorable in the eyes of both lenders and the FHA.

In some states such as Florida or resort areas, investors and vacationers have purchased condos where they do not intend to occupy them as their primary residences. Therefore, it has become challenging to meet the FHA occupancy requirements in these areas.

The condo association should have records of the percentage of units that are owner occupied which will need to be provided to your lender.

FHA Insurance Concentration

In addition to financial stability, the proportion of FHA-insured units in the condominium project must stay within the thresholds specified by the FHA for insurance concentration. This means that there cannot be an excessive number of units already insured by the FHA within the project. Maintaining a healthy balance between insured and non-insured units prevents over-reliance on FHA insurance.

The FHA insurance concentration rules for spot approvals indicate that no more than 10% of the condos can be financed with an FHA insured mortgage for projects that contain a total of 10 or more units. For projects that have less than 10 units, no more than 2 units can have FHA financing attached. Your condo purchase will be included in the numbers when calculating the percentages.

Important note – The FHA insurance concentration percentages are different for spot approvals than for condo projects that are already FHA approved. For projects that are approved, the concentration limit is 50%. We mention this because there are other resources stating a 50% concentration but it needs to be clear those do not apply to spot approvals.

Financial Stability

Financial stability is another important factor when seeking FHA spot approval for a condominium project. The property should have adequate reserves and demonstrate a healthy financial outlook. This means having enough reserves set aside for maintenance and unexpected expenses, as well as being able to cover essential services or repairs. FHA guidelines require reserves to be at least 20% of the annual budget.

The FHA wants to see responsible management of financial resources by the homeowners’ association (HOA), ensuring that the property is well-maintained and that residents won’t face unexpected financial burdens due to poor fiscal planning.

Properties Under the FHA Spot Approval

The FHA spot approval process offers flexibility to potential buyers eyeing individual units within condominium projects of 5 units or more that aren’t FHA-approved. This special approach allows buyers to leverage FHA financing options for specific units in non-FHA-approved condominiums, addressing their unique needs while adhering to FHA guidelines.

This provision opens up opportunities for buyers who are interested in specific units within multi-unit properties that may not have achieved overall FHA approval. It’s a lifeline for individuals who prefer the financial benefits of an FHA-backed loan to purchase a condo, even if the entire condominium project is not FHA approved. Home buyers should understand this process so they can make an informed decision when considering specific condo units within non-FHA-approved projects.

By recognizing individual unit eligibility within non-FHA-approved developments, the spot approval process effectively addresses the evolving real estate market’s demand for FHA financing options without compromising on regulatory standards.

FHA Spot Approval Checklist and Application Process 

If you interested in a condominium and it is not FHA approved, there are some steps you should take leading up to finalizing your sales contract. this includes finding the right lender, communication, and documentation.

Communicate with a Lender

The first step is to find an FHA lender who knows, and has experience in securing an FHA spot approval. The right lender will understand this process like the back of their hand and can guide you through each step and ensure that you have everything in place before submitting your application. It is not just about the spot approval, but

We can help you through this and can manage the spot approval process for you from start to finish. Contact us here for help.

Your FHA-approved lender becomes a critical ally in this process if they are well-versed in what FHA needs to see from a condominium project to approve it. They will help you understand what’s needed, where to direct your application, and what your chances are.

By working closely with an experienced lender, you reduce the likelihood of delays due to missing or incomplete documentation and increase the possibility of a successful outcome.

Document Collection and Preparation

The next step is to gather all the necessary documents needed for a spot approval. This includes financial statements, insurance details, and occupancy information for the condo. We can help you to get these items from the condo association. The real estate agent or seller can help provide the contact information for the condo association.

The financial statements show the financial health of the homeowner’s association (HOA), which is important to FHA because they want to ensure the condo project is financially stable. Insurance details provide information about the insurance coverage in case of damages. Lastly, occupancy information informs about the percentage of units in the community that are occupied by owners versus renters. This is also a key factor for FHA approval.

The loan officer can take the documentation and begin the spot approval process for you.

The Role of Developers in FHA Approval

Developers are not only responsible for constructing condominiums but also can help in ensuring that these properties meet the requirements for FHA approval. One of their primary responsibilities is to gather and submit detailed financial information about the condominium project, including its budget, reserve funds, and insurance coverage. This information is crucial for demonstrating the project’s financial stability and viability, which is a key consideration for FHA approval.

Developers also must ensure that the condominium project meets the FHA’s owner-occupancy percentage requirement. This means that there must be a certain percentage of units within the project that are occupied by the owners rather than being rented out. This can be a challenge in the beginning when it is the developer themselves that own the condos until they are sold.

Developers are tasked with providing accurate and up-to-date information regarding any ongoing or completed litigation involving the condominium project. This transparency is essential for FHA evaluation, allowing them to assess potential risks associated with the property and make informed decisions about spot approvals.

Finally, developers must ensure that the condominium project complies with all state laws and regulations as well as HUD’s specific approval requirements. This includes adhering to building codes, zoning ordinances, and any other legal requirements governing the development and operation of condominiums. By fulfilling these obligations, developers actively contribute to facilitating the FHA spot approval process and increasing the eligibility of individual units within their projects.

Why It’s Important to Work Closely with a Knowledgeable Lender

Working with a knowledgeable lender provides you with a crucial resource as you navigate through the complexities of the FHA spot approval process. They have experience working with condominium spot approvals and are well-versed in the specific requirements and documents needed for this type of approval. Their expertise allows them to anticipate potential roadblocks and provide guidance on how to address any issues that may arise during the process.

Key Benefits of Working with a Knowledgeable Lender:

Navigating Paperwork Understanding Eligibility Requirements Exploring Alternative Financing Options
A knowledgeable lender can help you compile and organize the necessary paperwork for spot approval, ensuring that all required documents are submitted accurately and promptly. The eligibility criteria for FHA spot approval can be intricate, but a seasoned lender can clarify these requirements and offer insights into how to meet them effectively. In some cases, alternative financing options may be available if a condominium faces challenges in meeting FHA approval requirements. A knowledgeable lender can explore these options with you, providing potential pathways to secure funding even if spot approval is not immediately attainable.

By enlisting the help of a seasoned lender, you gain access to valuable support that streamlines the spot approval process, maximizes your understanding of eligibility conditions, and potentially opens up alternative avenues for securing vital financing.

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Frequently Asked Questions

How does FHA spot approval differ from full project approval?

The FHA spot approval is different from a full project approval because their are different criteria and limits for spot approvals that do not exist when the entire condominium complex is getting approved.

What are the eligibility requirements for FHA spot approval?

The spot approval eligibility requirements include meeting the insurance and residency requirements in addition to some general financial requirements.

Can individual units within a condominium complex receive FHA spot approval?

Spot approvals are meant to cover individual units versus the entire condominium project.

Is there a maximum number of units that can receive FHA spot approval within a complex?

The maximum number of units that can receive an FHA spot approval within a complex is 2 units for projects of 5-9 units, and no more than 10% of the units for projects that are equal to or greater than 10 units.

How long does the FHA spot approval process typically take?

You can expect the spot approval to take two weeks of more. Condo buyers can shorten the length of time by helping to collect all of the required documentation quickly. Working with a loan officer who knows the process can also help to save time.

Can an existing property that was not previously approved for FHA be considered for spot approval?

Spot approvals are meant for existing properties that currently are not FHA approved.

How much does FHA spot approval cost?

You can expect the FHA spot approval to cost $850 for new or expired approvals.


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