Consumer Alert – FHA spot approvals are on their death bed.

FHA spot approvals are on their death bed, and some lenders it seems are ready to prematurely pull the plug. Here’s the back story.

FHA financing, which has gained popularity with the demise of the low-down payment mortgage, requires in the case of condominiums that the projects be on HUD’s approved condominium list. Absent this, FHA financing has required in the past that either a blanket approval be obtained for the project or that the lender apply for a “spot approval” (approval for the single unit being purchased). The spot approval, while requiring certain requirements be met in order to obtain HUD’s blessings, has not proven an insurmountable undertaking during a 45-day escrow period. Plus, the level of difficulty is obviously less than getting the entire project approved, so the spot was a handy alternative for many FHA buyers and their lenders.

That’s about to change. George Souto wrote a good summary of yet another implication of the underwriting guidelines which have been changing as often as a mother of quintuplets. In short, HUD is proposing to streamline the FHA approval process for condominium projects but, at the same time, is eliminating the spot approval effective October 1, 2009.  That’s a bummer, but it’s not the big bummer.

If you are currently in escrow on a purchase for which your FHA loan has been relying on a spot approval, you may find the financing rug pulled out from under you. One of our agents this morning received word that financing for a client who is supposed to close escrow next week was just yanked, her particular lending having decided to play it safe and adopt the new policy in advance.

Since this was a completely new subject for me, I don’t know if the “just do it” approach of this particular lender signals a pandemic. But, if you are an FHA borrower in the throes of an escrow banking on spot approval, or an agent representing one, you might want to make a phone call.

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