New FHA condominium guidelines: a chill in the air
Welcome back to Attorney Richard D. Vetstein. Today, he explains the new FHA regulations and how they will put more obstacles in the path of would-be condo buyers.
Under revised guidelines set to go into effect November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. Similar in some respects to the new Fannie Mae regulations issued earlier in the year, the FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers for condominium units.For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional financing. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.
New Project Eligibility Guidelines
All condominiums (consisting of 2 or more units) must meet the following requirements:
• At least 50% of the units of a project must be owner-occupied or sold.
• Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
• No more than 15% of units can be in arrears of their condominium fees.
• No more than 25% of the property’s total floor area in a project can be used for commercial purposes.
• A current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. The regulations don’t define what is “adequate” but guidance may be found in the new Fannie Mae guidelines which mandate at least 10% of annual operating budget in reserves.
• No more than 10% of the units may be owned by one investor.
• Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.
• An affirmative action-type housing plan is required for both new construction and conversions.
• Previously certified projects must re-apply every 2 years.
• The “spot approval” process is eliminated in favor of a more comprehensive review process.
The net effect of these new guidelines, combined with the recent Fannie Mae guidelines, is that it will be much tougher to obtain condominium financing as many projects will not be able to pass muster. Condominium associations, trustees, managers, lenders and buyers need to prepare and do a lot more work to approve condominium loans.
Click here for the new FHA condominium guidelines. You can look to see whether a condominium is already approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage.
I thank Attorney Vetstein again for the great legal information he has been providing on our blog.
Out in the real world, these things have affected mortgages on condos since the FNMA changes took effect:
1. New construction and newly converted condos had closings delayed until the project had sufficient sales.
2. Many, many, many two- and three- family house associations did not have sufficient reserves. Some larger buildings, also, but not as frequently.
Have you experienced delays due to other parts of the FNMA regs? Do you think the FHA measures will be effective in closing one more avenue for risky borrowing practices? Or are all these regulations just more red tape meant to make you jump through hoops for no good reason?
