The Federal Housing Administration is getting ready to implement new rules that could, in some cases, make it harder to get a mortgage to buy a condominium unit.
The new rules were supposed to take effect Oct. 1. But the FHA announced in mid-September that it would delay implementation of the new rules until Nov. 2, and that it might modify some of the policies.
Of the several new rules and requirements, there are four that most directly affect people who want to buy condos with FHA-insured mortgages:
- “Spot approvals” are eliminated, and now the entire project has to meet FHA approval before a borrower can get an FHA-insured loan.
- A maximum of 30 percent of the condo project’s units can have FHA-insured mortgages (there was no such limitation previously).
- Before the FHA will insure a mortgage on a condo, at least half the units must have already been sold (again, there was no such limitation previously).
- At least half of the condo project’s property owners will have to occupy their units, down from 51 percent.
That last item is actually a slight liberalization of the rules, but Realtors and mortgage lenders argue that the owner-occupancy rule should be relaxed even more at a time when so many condo units are vacant.
“If you’re trying to encourage real estate ownership, then why would you make it so much more difficult?” says Ellen Bitton, president of New York City-based Park Avenue Mortgage Group. “The people in the buildings will see a further deterioration in their values because nobody can get financing.”
The FHA matters because it allows borrowers to get mortgages with down payments as little as 3.5 percent. Conventional mortgages — that is, those that aren’t government-insured — usually require down payments of at least 10 percent and sometimes a lot more. Because the FHA requires smaller down payments and goes easier on people with low credit scores, about one-third of homebuyers are getting FHA loans this year.
Before the FHA will insure a loan on a condo unit, the entire condo project has to meet FHA guidelines regarding the financial health of the condominium association as well as fair-housing issues and site placement (for example, the condo isn’t next door to a smelly garbage dump or in a frequently flooded area).
It takes time and money to get FHA approval of a condo project. Since 1996, borrowers have been able to get spot approvals, in which the FHA insures a loan on a condo, although the entire project hasn’t been approved. “It’s a way around having to get a whole project approved if you’re just sort of the average buyer and you happen to find a condo unit in a not-approved project,” says Jerry Nagy, senior regulatory policy representative for the National Association of Realtors.
The FHA is getting rid of these spot approvals, and promises to make it easier, cheaper and faster to get entire projects approved. The “processes have been streamlined,” the FHA says, “eliminating the need to approve units on a ‘spot loan’ basis.”
The Realtors argue that the spot approval loophole is a handy tool to have, and that withdrawing it will limit consumer choice, says Nagy.
30 percent concentration
To reduce its exposure to losses, the FHA won’t insure a condo unit if 30 percent or more of the units in the project already have FHA-insured loans. This means that you could find a condo that you want to buy, but you can’t get an FHA-insured loan because too many people in the building already have FHA loans. If you can’t afford the larger down payment on a conventional mortgage, you could be out of luck.
The Realtors and the National Association of Home Builders have asked the FHA to eliminate or raise the limit, at least temporarily. The NAHB says the rule “would have an extremely negative impact on the condominium market.”
Presale requirement of 50 percent
When a developer builds a condo project, the FHA won’t insure a loan until at least half of the units have been sold. That presents a chicken-and-egg problem: People can’t buy with FHA-insured loans because other people couldn’t buy with FHA-insured loans. The FHA instituted this requirement to reduce its exposure to potential losses and to fight fraud.
Charles McMillan, president of the Realtors, asked the FHA to eliminate this rule or reduce the requirement to below 50 percent to give buyers more choices and to “reduce the number of vacant units in the market.”
On the other hand, Fannie Mae and Freddie Mac require up to 70 percent of the units in a project to be sold before they will back a loan.
Lenders and Realtors believe that the FHA delayed implementation of the new rules by a month to tweak the 50 percent presale requirement and the 30 percent concentration requirement.
“It used to be, if FHA approved a building, they would make a loan to every unit in the development,” says David Dessner, director of sales for New York City-based mortgage lender GuardHill Financial. The new requirements, if they are not changed, “leave a lot of people in the dust,” he says.
Owner occupancy requirement
The smallest change came in the owner-occupancy requirement. The FHA requires 51 percent of the units in a condo project to be occupied by the owners before it will insure a loan. That will be reduced to 50 percent, which will primarily will help small condo projects. For example, in a condominium with four units, two buyers will be able to get FHA-insured loans, instead of just one under the current rule.
Again, the Realtors and homebuilders want the FHA to eliminate this requirement.