New Green Shoots? How About Significant Improvements to FHA Condo Guidelines!!!

Washington's buzzword last month was "green shoots" to suggest tiny indications of improvements to the economy and financial markets. After 2 years of lender closures and program cuts, this fall we may just start seeing some green shoots in mortgages, as well.

Mortgage financing on condominium properties has been a sore point for mortgage and real estate professionals this year due to the intensified scrutiny these properties receive from underwriting, and the often-frustrating guideline variations from one lender to the next. Perhaps most challenging for the mortgage professional is that we are unable to provide our clients with assurance that the condo has been accepted, as most underwriters wait to evaluate the condominium information until all other aspects of the loan have been approved. Much of this difficulty comes from significant variances in guideline application from one lender to another and from one underwriter to another. While, the changes to follow relate to FHA mortgages, conventional loans haven't been easy either.

On one loan I closed recently, we initially locked the loan with one lender, but never submitted it to them when it became apparent the property would fail condo approval there due to one other unit owner's delinquent dues. It was submitted to a second lender, but rejected there due to the seller's profit - he had acquired it a little under a year earlier, and, after a total rehab of the property, was projected to make $20,000 or about 15% which the underwriter thought was too much. The most aggravating part of that rejection was that the same lender had just closed a nearly identical transaction for a different seller represented by our seller's agent, but we couldn't use that transaction for leverage because adding ours would have put the lender over the maximum 10% concentration in the condo complex that FHA allows. A third lender finally approved and closed it, but not before a 2nd appraisal was done on which the appraiser, who is registered with FHA, stated that he was unable to judge whether or not the property met FHA approval guidelines.

Obviously, if anything could have gone wrong, it did on that transaction, but many of the problems stem from uneven application of FHA guidelines. Well, FHA will be changing those guidelines this fall, and it appears that the changes are largely positive, and include relaxation of requirements on commercial space in the complex, minimum number of units, percentage insured by FHA, and more. The existing processes for approval will be eliminated, and replaced by two simpler processes, one through HUD, and another at the Direct Endorsement Lender level. Here are a few of the highlights:

• Minimum units in complex reduced to 2
• Up to 25% of space in complex may have commercial use
• No more than 15% of unit owners may be in arrears on association fees
• Phasing is permitted
• 30% of properties in complex may be financed by FHA-insured loans

Several of these changes will be game changing. Providence experienced a large wave of condo conversions in the first half of this decade, as owners turned 2-4 unit properties into 2 or 3 condominium units. Previously, these properties were downright unfinanceable for buyers needing FHA financing. Not any more. The adjustment to a straight 30% limit on FHA-insured properties is also quite significant, as it will allow larger complexes more financing flexibility.

According to information from HUD, these guidelines will go into place October 1st of this year, however, if history is any indicator, adoption and adherence by different banks will be varied. Because the HUD guidelines provide only a minimum property requirement, it is likely that many lenders will apply their own "underwriting overlays" which will allow them to be more restrictive than the rules would otherwise allow. This is one of the areas I am happiest about being a broker; while we do have a lot more work to do to understand differences in underwriting requirements from one lender to the next, this knowledge helps us close loans that no one else can.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance for Roger Williams University and the University of New Haven. He can be reached by phone at (401) 263-8655, or by commenting on this article.