That’s great news for Hawaii’s working families: condominiums are a traditional first rung on the ladder to wealth through property ownership. It’s especially good news for first-time homebuyers, who don’t have a lot of home equity to roll into their new home, and for people with below-average credit scores – both of whom rely a great deal on FHA loans to realize the dream of home ownership.
Unlike conventional loans that typically require a 10% to 20% down payment, the FHA guarantees loans with down payments as low as 3.5%.
“Today we are making certain FHA responds to what the market is telling us,” said FHA Commissioner Brian Montgomery in a statement. “This new rule allows FHA to meet its core mission to support eligible borrowers who are ready for homeownership and are most likely to enter the market with the purchase of a condominium.”
Oahu condominium prices are up 4% over last 12 months ending September 2019.
–Source: Hawaii Realtors Association
After the 2008 mortgage crisis hit the condominium market hard, nationwide, a lot of lenders pulled in their horns and restricted the condominiums they were willing to finance.
The FHA also increased restrictions – especially on condominiums – in order to lower their risk. For example, the FHA stopped guaranteeing so-called “spot loans,” which allowed FHA borrowers to buy individual units meeting certain criteria even if the condo development itself did not qualify for FHA approval.
As a result, FHA borrowers were locked out of more than 93% of the condominium market. Of the more than 150,000 condominium developments nationwide, only 6.5% of them qualified for FHA financing.
The New FHA Condo Rules
Effective October 15th, 2019 there was a whole new world available to condo buyers who want to use FHA loans. Now, borrowers can potentially get a single-unit approval (SUA) on any condominiums that meet the following criteria:
• The development has five units or more;
• There are a limited number of FHA-insured units*;
• At least 50% of the development is owner-occupied;
• Commercial space is limited to 35% of square footage.
The FHA also made some changes that make it easier for condominium associations to keep themselves certified for FHA approval. That will also help bring condominiums to market and increase the available inventory for sale.
The new rules should help make a lot of inventory available to FHA borrowers. The FHA estimates that the new rules will enable 20,000 to 60,000 more borrowers to become homeowners via FHA condo loans.
This is significant: Historically, the vast majority of FHA condo loan borrowers – about 84% — have never owned a home before.
These FHA condo loan reforms stand to make the dream of homeownership a reality for many Hawaii residents.
Hawaii FHA Loan Limits
As of 2019, the FHA caps the amount you can borrow under their program at $726,525 for a single-unit dwelling in most of Hawaii, and all of Oahu and Maui – which should be enough for most reasonably-priced mid-market condominiums in Hawaii. According to the Honolulu Board of Realtors, the median price of condominiums on Oahu is $445,000 as of September 2019. That’s an increase of 4% compared to the year-ago period. For Maui County (including Molokai and Lanai), the median condominium sales price was $496,950.
At a current median condo price point of $445,000 on Oahu, the median FHA condo buyer’s 3.5% minimum down payment would be $15,575.
Minimum Owner-Occupancy Requirements
At least 50 percent of the units in the condominium must be owner-occupied, in most cases.
FHA Insurance Concentration in Condominium Projects
FHA will only insure a maximum of 50 percent of the of units in approved condominium projects.
Commercial/Nonresidential Space Limits
Commercial/non-residential space can only be a maximum of 35% of the floor space in the condominium development.
The condo being purchased must be ready for occupancy and not requiring further renovation, construction or improvement.
More details available here.
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*For condominium projects with 10 or more units, no more than 10 percent of individual condo units can be FHA-insured; and projects with fewer than 10 units may have no more than two FHA-insured units.