New FHA Mortgage Rules For Condos Start October 1st

by Peter G. Miller
September 9th, 2009

Lenders across the country has begun to gear up for new FHA condo standards which will begin October 1st.

The revised FHA mortgage rules were announced in a June letter to lenders from HUD. The bottom line is that if you now have a condo and want to finance or refinance with an FHA-backed loan, the process will now be more difficult. Here are some of the standards that HUD is requiring.

First the good news: Project approval is NOT required for FHA?to?FHA streamline refinances or for FHA/HUD Real Estate Owned (REO) sales. If you’ve got an FHA loan and want a streamline refinance you’re golden.

Ineligible properties include condominium (“condotels”), timeshares or segmented ownership projects, houseboat projects, multi-dwelling unit condominiums [i.e. more than one dwelling per condominium unit], and all projects not deemed to be used primarily as residential.

Here are some additional standards for condo properties, as explained by HUD:

___ At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).

___ No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.

___ Projects consisting of three or less units will have no more than one unit encumbered with FHA insurance.

___ Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.

David Reed, the author of Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell You and a mortgage lender based in Austin, Texas, points out that the standards established under the new FHA rules may represent minimums rather than maximums.

For instance, the FHA might say that 50 percent of all units must be owner-occupied, but a lender might require 60 percent or even 70 percent.

Another potential problem, according to Reed, concerns litigation. When a condo project is being sued lenders may not want to finance individual units because of potential liabilities. For instance, if a condo project loses a suit and each unit owner must pay a big special assessment, that would be an additional risk to lenders — and not without reason.

The problem is that the litigation, even if minor, might delay or stop lender interest in a property.

The bottom line looks like this: If you’re refinancing a condo and now have FHA financing you should be fine. If you’re buying or selling a unit after October 1st, FHA-backed financing may be tougher.

In either case, be sure to speak with lenders, especially those who have already financed units at the project.

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This entry was posted on Wednesday, September 9th, 2009 at 12:59 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

3 Responses to “New FHA Mortgage Rules For Condos Start October 1st”

  1. New Homes Builders Says:

    This only affects new developments that haven’t been approved by FHA yet. If you’re buying or selling an existing condo, and the development already has an FHA case number, you should be fine. And FHA has delayed implementation of these new rules until November 2nd. It also looks like they may be considering softening some of these new requirements. Keep your fingers crossed!

  2. Robin Says:

    Hi. I am a condo owner and have recently applied to refinace, but was told that because the entire condo phase was not complete I couldn’t. My part of the many phases is complete and I have excellent credit, what else can I do? It sucks that people that have good credit and want to refinance are the ones that are being screwed!!
    Thank you VERY Much in advance

  3. john Says:

    I own a stand alone house that is in a condo ass.I tried to refinance through wells fargo which holds my mortgage but because of these they say i can’t .My credit is excellent and they some other program but apraiser wouldn’t except apraisal because he had nothing to conpair it to.Anybody have a suggestion

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