Financing Your Condominium – FHA Rule Changes

Buying a condominium has gotten more complicated since the housing crisis.   The effects of so many condos in foreclosure have made financing your condominium difficult. FHA financing for condos is a challenge in many Frederick condominium communities. Conventional financing can also be a challenge, depending on the particular product. Here is the latest info on FHA Financing for Condominiums in Frederick:

FHA Rule Changes

The latest effort of FHA to lower its risks has affected condominiums. Unlike single-family home ownership (fee simple), condo ownership has stricter rules for mortgage insurance. The entire condominium project must meet certain standards for a single condo unit to get FHA financing. As of October 1, 2010, the standards got tougher, with FHA’s rules. Then in November 2015, FHA eased up on some of the rules. 

The two rules that particularly apply to our current housing distress are:

• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. (used to be 10%)
• No more than 15% of units can be arrear more than 60 days. (used to be 30 days)

Because of all the condos in foreclosure or in a short sale, the HOA dues are not paid, and several associations have a large number of their units in arrears. This means that the condos in that entire project cannot be purchased with FHA loans. Financing your condominium in Frederick may take a conventional loan product in many condo communities.

Related: What’s the Difference Between Conventional and FHA Financing?

The second issue is that many units are being purchased by investors, so the percentage of owner occupancy is decreasing in many condominiums.  No FHA financing there. In some cases, even conventional financing won’t work.

Other Basic FHA Guidelines

• No more than 50% of property can be used as commercial space
• No more than 50% concentration of FHA Loan
• At least 10% of the budgeted income of the HOA must go toward a reserve account (with the shortage of condo association funds due to arrears, often this is a struggle to maintain)
• Insurance must comply with several conditions (expanded with the Nov. 2015 rules)

Where in Frederick?

The HUD Website has a list of Condominium Developments and their current status as far as FHA approval.

As of Spring 2016, the FHA approval has been rejected for one Condominium Development in Frederick: Avington Park

FHA approval has expired for

• Park Place at Mill Island
• >The Overlook
• Audobon Terrace North
• The Commons of Avalon
• Riverview
• Monocacy Overlook Garden
• Overlook Condominium
• Ballenger Creek II
• Stuart Mechanic II
• Liberty Garden Condominium
• Amertown Antietam
• Frederick Heights
• San Souci

This list is fluid and could change at any time.

Onerous Application Process

The process for applying for FHA approval has become very complicated. Over stressed condominium associations often don’t have the resources to complete the process, so that’s why you see the large number of expired condo communities in the above list. Many times we see that the process of renewing the application for approveal is so onerous, that even condominium communities that are eligible, haven’t completed the process.

NAR Lobbies for FHA Legislation

The National Association of Realtors® (NAR) continues to lobby for more reforms of FHA condominium rules, supporting a current bill, H.R. 3700, the “Housing Opportunity Through Modernization Act of 2015.”

The legislation includes provisions intended to help expand housing opportunities in the marketplace, including measures that would reform current Federal Housing Administration restrictions on condominium financing.

“Condominiums are often the most affordable homeownership option for first-time buyers, small families, single people, urban residents, and older Americans.” NAR President Chris Polychron said in last year’s testimony before the U.S. House Financial Services Subcommittee on Housing and Insurance.  “Unfortunately, current FHA regulations prevent buyers from purchasing condominiums, harm homeowners who need to sell their condominiums, and limit the ability of condominium projects to attract resident buyers.”

Current Status of HR 3700 – Passed and Signed into Law

This legislation is sponsored by Reps. Luetkemeyer (R-MO) and Cleaver (D-MO). It passed the House with a unanimous vote of 427-0 in February 2016, then passed the Senate, and was signed by President Obama on July 29, 2016.

HR 3700 contains provisions to ease FHA restrictions on condo sale and purchase; provides permanent authority for direct endorsement for approved lenders to approve Rural Housing Service loans; and makes reforms to federally assisted rental housing programs to streamline the program.

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