FHA Loosens Rules on Condo Lending

Some news for condos in RIttenhouse Square, Bella Vista, Old City, and beyond.

(211-25 S. 4th Street 201 The Willings, as seen in pic)

Real estate and mortgage professionals wait expectantly to hear that some of the stringent rules on Federal Housing Association (FHA) lending for condominiums may ease soon. A major factor in the highly depressed sales rates over the past 18 months, the harsh requirements include such deal-breakers as commercial space not exceeding 25 percent; less than 50 percent renter-occupied or investor-owned and no more than 15 percent of units with past-due homeowner assessments. More stultifying is a rule that imposes harsh personal liability on association board members if FHA approval applications presented from their association contain errors.

This latter issue is credited with many associations not being willing even to apply for approval as an FHA sanctioned project. Some industry experts suggest that because of these rules and the personal liability rule in particular, only 25 percent of condominium projects that could be eligible for FHA mortgages actually are, further depressing the housing market in urban areas like Los Angeles, California; New York City, New York; Chicago, Illinois; or Minneapolis, Minnesota.

Mixed-use properties are particularly hard-hit by the commercial space rule. Currently, the FHA will not allow condominium financing in projects or buildings where commercial space such as retail stores, offices, health clubs and coffee shops account for more than one-fourth of the building’s square footage. While walkways and common areas do not count against the required 75 percent living space, the kinds of neighborhood amenities and conveniences that make urban condominiums attractive—the urban grocery market, florist or shipping service—are the very causes of their not being eligible for the popular low down payment mortgages buyers in the condominium market rely on.

Another challenge in the weak economy is the 50 percent owner-occupied requirement. Investors with cash have snapped up available space, particularly bank-owned units, in response to the burgeoning rental needs of displaced homeowners and suburbanites moving to urban areas for employment and to offset the high cost of commuting. Unfortunately, this makes the entire building ineligible to FHA funding, so condominium owners trying to sell have a smaller pool of qualified buyers. In the case where the condominium owner-occupier needs to relocate himself, he faces the difficult decision to either rent his own unit or sell at a lower price to an investor with cash, thereby exacerbating the problem for his neighbors.

In the recent economic upheaval, delinquent association dues have risen above normal levels. When an association has more than 15 percent of dues that are just thirty days in arrears, no unit in the building is entitled to FHA eligibility. This puts an extra burden on all homeowners in the project. Some real estate professionals report that homeowners trying to sell have offered to pay all past-due association assessments just so that their own unit can qualify for the federal loan. Others, trying to refinance to improve their own economic standing, find that they are unable to take advantage of FHA funding, except for the FHA Streamline Refinance, when their neighbors have fallen behind on dues payments.

Although there is no set date, or even specific language available regarding when the rules might be relaxed, FHA officials have expressed being willing to reexamine some of the issue the rulings have caused. Particularly, they anticipate clarification some of the language regarding personal liability of association board members so that there is more willingness to apply for FHA eligibility.

Moving? Know the value of your home …