Some positive news from FHA today on its condo financing rules, with more changes expected to come in the near future.
The changes should make it easier for borrowers—both investors who want to buy more than one unit and those who are buying just their primary residence—to get financing, which has tended to be more of a challenge than in the single-family market. With condo financing it’s not just the borrower who has to be approved—the project itself has to be approved. And that’s been a source of frustration for borrowers and the sales associates working with them.
Under changes announced today by FHA, investors can come in and buy more units in a project than they could previously. They can now buy up to half of the project units, up from just 10 percent before, but they have to jump through a hoop to get the okay: at least half of the units have to have already been conveyed to individual owners or be under contract as owner-occupied.
Projects can also have more space devoted to non-residential commercial uses than before. Up to this point, only a quarter of project space could be used for commercial purpose. Now half of the project can be, although certain authority for approval is reserved for the local FHA office.
These two changes together are fairly significant, but there are a few others worth noting.
One is a softening in the language about the representations made in condo board certifications. The penalties for false certifications by the board representative is the same, but with the new language, FHA is acknowledging that board representatives often rely on an attorney’s advice about the project’s compliance with state and local laws. It also removes language in which the person signing certifies he has no knowledge of circumstances or conditions that may cause a mortgage to become delinquent.
Finally, the agency is softening its stand on delinquent home owner’s association (HOA) dues. It’s now allowing up to 15 percent of a project’s units to be 60-days delinquent on HOA dues, up from just 30 days delinquent. This change acknowledges the tough times condo projects have faced as underwater owners of individual units struggle to pay their HOA fees.
Owner occupancy limits
Although these are good changes, one of the main impediments to FHA condo financing remains unchanged, and that’s the requirement that half of a project’s units be owner-occupied before anyone can get financing to buy. If the unit is an REO, the 50-percent rule is waived, but NAR wants to see the owner-occupancy requirement eliminated entirely. That’s probably the biggest hurdle for buyers today.
FHA financing limits
Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50 percent. That limitation remains unchanged.
And what’s known as the “spot” approval process remains prohibited. FHA used to allow these spot approvals but eliminated them a few years ago and NAR would like to see them allowed again. These types of approval apply to new projects. FHA requires 30 percent of the units in a new project to be pre-sold before it will approve an application for an FHA-backed loan. With spot approvals, FHA used to allow individual buyers to get FHA financing even if the new building didn’t meet the 30-percent threshold, but that’s no longer allowed.
FHA says the changes announced today are interim measures and that it’s preparing a more formal and comprehensive rulemaking, so some of the changes NAR is seeking could still be forthcoming. In any case, NAR, which worked with other groups to play a lead role in getting FHA to make these changes, continues to talk to FHA officials about this important but still tough segment of the financing market, but today’s changes are a move in the right direction.