Real Estate Investing:No More FHA Spot Approval for Condos

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Back in July I wrote a post about FHA approval for condos and in it I mentioned that FHA can do a spot approval for an individual condo unit in a complex that is not already FHA approved. The spot approval is an option for a home buyer (through their lender) to get a condo they wanted to buy OK’d by FHA.

However on October 1, 2009, the FHA spot approval will be eliminated. In reality though, the deadline is earlier because lenders need to get their loan packages to FHA well in advance of the October 1, 2009 deadline.

If you’re considering a condo that will require a FHA spot approval, my advice to you is get moving fast.

However, if the complex you’re interested in has a “right of first refusal” written into its declarations and by laws, a spot approval will not help you currently since it’s an automatic denial.

What is a right of first refusal?

From National Associations of Mortgage Processors:

“A right of first refusal places a restriction on conveyance of the seller’s title and in short, allows the HOA the right to buy a unit at the price and terms the owner might negotiate with an eligible buyer. Often the association elects to include a right of first refusal clause in their declarations and bylaws because they do not want to allow one of the unit owners to sell at a discounted sales price because they fear that their own market values would be adversely affected.

HUD, however, views a right of first refusal as having the potential to negatively impact the marketability of the property because potential buyers may not be so thrilled about proposing an offer only for it to possibly be refused because of the HOA’s right to override the offer and thus purchase the property themselves. HUD views the right of first refusal as a restriction and thus, an added risk for the property itself. “

It may actually be better to wait until October 1, when FHA will not automatically deny a complex that has this clause in its documents. A full approval will be required for the entire complex and at this point, I’m not sure who will pay for this (the buyer, the lender, or the complex) and how long full approval will take.