Subscribe
The Federal Housing Administration (FHA) has delayed the implementation of rules that could make life more difficult for condo buyers across the country. The delay should be especially helpful for those hoping to qualify for the first-time buyer tax credit that expires after Nov. 30.
The new FHA rules, which were to take effect Oct. 1, 2009 will now be effective on Nov. 2. They are designed to improve the lending process, but they could cause some short-term delays in completing loans and closing purchases. The FHA was wise to delay the implementation of these changes. Now, buyers trying to close a transaction by Nov. 30 should be able to file their FHA loan applications early enough to qualify under the old regulations.
The importance of FHA financing has grown substantially in the last few years because conventional mortgage financing has become harder to obtain due to more stringent underwriting requirements. According to some estimates, 25% of homes purchased this year in the United States will use an FHA insured mortgage, up from 2% just three years ago.
About 1/3 the transactions I've closed this year involved FHA backed mortgages, and most of those folks were first-time buyers purchasing a condo. Many first-time buyers are short on cash and turn to FHA financing because it allows them to put down as little as 3.5%, in contrast to the 10% down payment required for most conventional loans.
The new FHA regulations now will apply to all mortgage applications received on Nov. 2 or later. Files that were initiated prior to Nov. 2 will be processed under the old regulations, even if the loan does not close until after Nov. 2.
The major reason the new regulations may slow down the purchasing process when they become effective is that they end what are known as spot approvals of individual condominium units. Instead, the entire condominium property will need to be approved before an FHA-insured loan can be used.
Many condominium properties have never received FHA approval. However, even those condo complexes that now have FHA approval will need to be recertified after Nov. 2 if their approval was recieved more than two years ago. It may be possible to expedite that certification process by seeking a loan from an institution that is also an FHA Direct Endorsement Lender. That status allows a lender to directly carry out the certification process needed to grant FHA approval to a condominium complex.
The new FHA regulations taking effect Nov. 2 also contain other restrictions that could make life more complicated for condo buyers. Here is a partial list:
-At least 50% of units in the project must be owner occupied or under contract to owners who intend to occupy them. For new construction, the 50% owner-occupied rule applies to those units closed or under contract.
-For new construction condominiums, at least 50% of the total number of units planned must be sold or under contract before an FHA insured mortgage can be closed.
-No more than 25% of the total floor area of a condo property can be used for commercial purposes.
-No more than 15% of the units can be more than 30 days past due on their assessment payments to the condominium association.
There is, however, some good news for borrowers in the new FHA regulations. For example, they eliminate the long-time prohibition against the FHA financing units in condominiums where the homeowners association retains a right of first refusal.
Another change allows the FHA to insure loans in new condo conversions for any qualified buyer. Previously, only former rental tenants could get FHA financing for the first 12 months.
The changes in FHA regulations are just one example of the current environment. It has seemed as if lending requirements have been changing on a daily basis this year.Thjose looking for a condo will benifit greatly by working with a Realtor who knows the local condominium market. An agent with in-depth knowledge of the local market offers two important advantages to buyers right now, First, they are going to know which condo buildings offer the best opportunity to secure good financing, whether it's conventional or FHA. If you have a building where the association has financial problems or one with a high percentage of renters, it can be almost impossible to get a mortgage right now. Second, the agent will help buyers avoid the potential potholes that can come with condominium ownership. For example, before I even show a condo building now, I will study the minutes of the condo board meeting to learn what plans and problems might be on the horizon. An agent who doesn't normally work in an area just can't develop that kind of knowledge.
