FHA Delays New Condominium Requirements

by Karen Lawson
November 5th, 2009

In a reversal of its plan to tighten eligibility guidelines covering condominium units under its mortgage insurance program, FHA announced that it will review and revise changes to condominium lending requirements released June 12, 2009. The original revisions were seen as too difficult for FHA lenders to follow without incurring significant delays in approving and processing FHA home loans.

Revising Revisions: Changes Delayed as FHA Reconsiders Condo Guidelines

Highlights of the original proposal include:

  • No more than 30% of units within an FHA-approved complex could be insured by FHA. This reduces the current percentage of FHA mortgages allowed within approved condominium developments from 50%. Condo developments consisting of 3 or fewer units would only be permitted one unit insured by an FHA mortgage or FHA refinance.
  • The new requirements would no longer allow “spot loans” within condo complexes awaiting FHA certification. All condominium loans would have to be made on units within FHA-approved complexes.
  • Most problematic for lenders is the proposal requiring all FHA-approved condominium complexes to be re-certified every two years. In its announcement of the delay of changes to its requirements for insuring mortgages secured by condominium units, FHA indicated that it would review this requirement. This move could prevent delays in approving loans within condo complexes due for re-certification. FHA lenders with direct endorsement authority would retain authority to certify condominium projects, which could prevent delays in approving FHA mortgages in condominium developments due for re-certification.

Loosening these guidelines could be good news for those seeking an FHA mortgage or refinance on a condominium unit, as delays can cause problems for homeowners, buyers, and sellers, particularly if mortgage rates rise while borrowers await purchase or refinance approval.

Condominium Units Offer Affordable Alternative

First-time buyers may find condominiums more affordable than single family homes, and can more easily get approved for mortgages under FHA qualification requirements. Any significant restrictions placed on approving FHA home loans secured by condominium units could place additional hardship on first-time buyers. FHA mortgages provide access to condo ownership for people who may be first-time buyers, facing credit challenges, or those who need low-cost, low-maintenance housing. Condominium units are popular starter homes for first-time buyers, and also provide affordable homes for empty nesters or seniors desiring smaller homes with less maintenance.

These buyers and others could be impacted if FHA holds its ground on its revised requirements for home loans secured by condominium units.

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