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FHA Condo Approval Change 2019: What it could mean for Northern VA real estate

October 2019

Condos in Northern VA: A brief history

In October of 2019 the Federal Housing Administration (FHA) will be issuing new guidance on the approval process for condos. The long awaited rule changes are predicted to boost the condo market across the country. The ever enthusiastic NAR has come out in support of the new rules. Before we get into what is changing, let us see how the Northern VA condo market got to where it is.

In 2009, the FHA issued rules on approval processes for condo complexes. They were tight guidelines. Condo communities had to go through an approval process in order to qualify for FHA to fund any buyers in that complex. Because of the long process, many condo communities chose not to be FHA approved. They either did not file an application or allowed it to expire. The approval needed to be updated every 2 years and required a large amount of information.

Others simply did not qualify because they had too high of an investor ratio (over 50%). For our clients, we encouraged them to visit the FHA condo approval lookup portal. This will give you a fast look at whether a complex is currently approved.

If you glance at the list in the link above, many condos in Northern VA are either expired or rejected. Why is it significant to the Northern VA condo market that many condos were not approved for an FHA insured loan?

An FHA insured loan is a special loan program that is reserved for first time buyers (no ownership in a property in the last 3 years). They are also generally easier to obtain than a conventional mortgage.

Lower down payment, more flexible with low credit scores, low rates and options with gifts for down payment from a friend or family member. If a condo unit is not approved to accept an FHA insured loan, it eliminates buyers that would otherwise purchase those condos.

This is especially true because the price range of some of these condos attract first time home buyers. Therefore, supply and demand would state that no FHA loans would affect the resale value of the complex because there would be less buyers to write offers.

Why did they make such stringent legislation? When the housing bubble burst in 2006-2007, many condo complexes were owned by investors. Basically, there was rapid foreclosures and price drops that did a lot of damage to the complexes value and default on condo association dues, and the FHA found condos to be risky at that time so wanted to limit how many loan they would insure.

New FHA Approval Process for Condos

If you want a good thrilling read, here is the actual document from the FHA about the new condo approval change. I glanced through some of it, however most of what I will summarize here is from this press release and some of my own research from statements made by the FHA. There are quite a few changes coming. However, these are the 3 biggest ones in my opinion that will affect the Condo market in Northern VA.

If you want a good thrilling read, here is the actual document. I glanced through some of it, however most of what I will summarize here is from this press release and some of my own research from statements made by the FHA. There are quite a few changes coming, but these are the 3 biggest ones in my opinion that will affect the Condo market in Northern VA.

1. Easier and longer FHA approvals for complexes

These changes likely will result in a lot of complexes getting FHA approval. For starters, the FHA is making it so that there can be more investors in a complex, and still get approval. It used to be that you needed 50% of the owners of a condo complex to be owner occupants. That number can now go as low as 35% owner occupants, based on other financial conditions being met.

The FHA also extended the time frame from 2 years now and will change up to 3 years for a complex approval. In addition, it will also now be easier to re-certified. Condo complexes only need to submit updates and not re-submit all project information all over again every time.

This may be more exciting for condo boards and property managers, but if you are a buyer in the future looking for a condo it will definitely affect you as well!

2. Single unit approval process for non approved condo complexes

This one is huge. Let’s say you are an FHA approved buyer. You find a condo you want to purchase, only to find out that the condo complex is not FHA approved. Prior to these changes, you would have to either try to get different financing or move on.

Now the FHA is stating that they will insure some units with a single unit approval, regardless of FHA approval. Now an FHA insured buyer may still be able to buy the condo they wanted in the complex that has an expired or rejected FHA approval. The FHA has currently said they will approve up to 10% concentration in these complexes.

3. There will also be a range to add more approval of mixed use complexes

This is a big deal for Northern VA, as many of the developments are now being built with the first floor dedicated as a grocery store, shops and other commercial space. This flexibility should allow for these mixed use developments to allow for FHA insured loans. It appears the FHA will allow for 35% commercial space of the total floor area.

Buying new? Check out our new construction guide.

These three rules are just a portion of the total guidance, however I think they are the most relevant to condo buyers and could have an immediate effect on the Northern VA condo market.

Was the condo market really lagging in Northern VA?

I got into the real estate market as an agent in 2013 and bought my first townhome in Fairfax County in 2014. I had a feeling that townhomes would have better appreciation overall. At the time, they appealed to a larger number of buyers because of their size and also they were easier to finance. Of course that is now changing.

I was vocal with some clients about this, depending on what there goals were. There is a good time to buy a condo. The price of acquiring one is lower and they are usually lower maintenance than other types of housing.

They also make good rental units because they rent quickly and are easy to get a new lease when tenants leave. However, I often shared that I thought that townhomes would appreciate more long term than a condo would.

The question is, was I correct?

Did Northern VA show a lagging condo market that needed bolstering? Did townhomes gain more equity?

A look at the numbers

Let’s look at the numbers. I took the average sale price of all condos, townhomes and single family homes in the following areas: Arlington County, Alexandria City, Fairfax County, Fairfax City, Falls Church City, Loudon County and Prince William.

All of the homes evaluated were sold in the Bright MLS. If you are not from our area, this will give a pretty good snapshot of the Northern VA real estate market. The above areas it covers a large portion of Northern VA. (Who knows where Northern VA really ends anyway? That is sometimes debated).

From January 2014 to July 2019 Condos sale price went up 7.7% total on average in this Northern VA sample in this time period. During the same timeframe and same sample area, Townhomes average sale price went up 12.9%. And finally, in the same sample size, detached single family homes went up 12.3%.

There are other factors in owning each type of home. Condos also have higher fees for the condo association than a townhome. But is often offset by lower maintenance costs.

However, considering value alone townhomes appreciated 5.2% more than condos in our large Northern VA sample according to average sale price over the last 5.5 years. I am working on another article about benefits of townhomes with the exact numbers for you data heads.

I will link to it when I am finished. The numbers are even more pronounced in the last 10 years: Average sale price of Townhomes went up 60%, single family detached 49% and condos 36%.

So what do all these stats tell us? Over the 5.5 years starting in 2014, townhomes have gone up in value at a faster rate than condos. It also tells us that during the same timeframe detached homes have pretty much kept pace with townhomes. That would mean that yes, it does appear that condos in Northern VA have needed a boost.

Will Northern VA condo complexes go up in value with these FHA approval process changes?

This is a very difficult question to answer with certainty. There are alot of factors that go into a real estate market. One thing we do know for sure: the new FHA condo approval process can only help. As time goes on these changes should open up more condo complexes to the FHA loan. This should, therefore also mean more buyers.

The FHA themselves have stated that a large number of units will become available that were previously only available to conventional mortgages or cash buyers.

If you own a condo or you are looking to purchase a condo in Northern VA, this week could signal the end of an era of slower growth. Time will tell, but the new FHA condo approval process combined with the continued demand from first time buyers in the market should spell good news for the Condo market.

Future Values

A year from publishing this article, I will come back and update the numbers above. This will show just how much the average sale price of condos, townhomes and detached homes went up in Northern VA. If the numbers are close (5% is a big gap when talking about such a big asset like real estate); that will show that condos were highly responsive to the new rule changes.

If you have any questions about the real estate market, we are experts in Northern VA and are always happy to help. Feel free to reach out.

Will Rodgers

Will is an award winning real estate agent, author and high tech marketing expert. Adopting a consultative approach he has helped hundreds of clients meet their real estate goals in the Northern VA real estate market.

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