FHA: New Rules Desgined to Boost Condo Markets

by Karen Lawson
December 9th, 2009

The FHA has made temporary and permanent changes to rules governing condominium complexes. These changes are intended to help more buyers qualify for FHA loans for buying condo units, and could help sagging condo sales.

Getting an FHA mortgage loan for buying a condo can be problematic, as both the complex and individual units are subject to FHA lending guidelines. In an effort to increase accessibility to home loans for condo buyers, FHA is changing some policies concerning its approval of condominium complexes and mortgages.

FHA Temporary Changes to Condominium Loan Policies

  • FHA has increased from 30% to 50% the maximum number of units financed with FHA loans within a condominium complex.
  • It reduced the number of units within a complex required to be owner-occupied from 51% to 50%; bank-owned units either vacant or tenant-occupied are not included in the percentage calculation.
  • Deadline has been extended for spot loan approvals until February 1, 2010; this means that individual FHA loans within a complex can be approved if the lender believes that the complex qualifies for or is in the process of getting FHA approval.

Permanent Changes to FHA Guidelines for Condos

  • Units in condo complexes requiring the HOA “first right of refusal” are now eligible for FHA loans as long as the HOA doesn’t violate federal fair housing guidelines.
  • A prior requirement for attorney certification of eligibility for FHA financing has been waived; this is expected to reduce costs to buyers and homeowners wishing to refinance with FHA loans.
  • FHA loans are prohibited in complexes where more than 15% of units are more than 30 days delinquent on HOA dues.

New FHA Guidelines: Potential Benefits and Drawbacks

  • Relaxing some FHA guidelines may make condo financing accessible to more buyers, as conventional lenders often view condos as higher risk and require larger down payments. FHA loans would allow first-time buyers and others without a 20% (or more) down payment and closing costs access to buying condos.
  • Excluding bank-owned units from maximum owner occupancy requirements could make more complexes approvable; a complex of 50 units with 5 units bank-owned, 25 owner-occupied, and 20 rented out would not have been eligible under old guidelines; under new temporary guidelines, it comes in at 56% owner-occupied (25 / 45 units).
  • Extending FHA loan eligibility in complexes with “first right of refusal” requirements would make more complexes eligible for financing units with FHA loans, but could result in housing discrimination if more complexes adopt “first right of refusal” rules now that FHA permits them. (First right of refusal allows a condominium’s homeowners’ association to approve or disapprove potential buyers, subject to fair housing laws.) Whether this change is good or bad for potential FHA borrowers depends on how or if HOA refusals are monitored.

These changes to FHA guidelines may help stimulate condo purchases and revitalize condominium complexes and neighborhoods hit hard by foreclosure, but it will take months if not longer for determining if the changes work.

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This entry was posted on Wednesday, December 9th, 2009 at 11:44 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.

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