New guidelines to help condos get FHA loans

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Many first-time homebuyers consider condos a good home when starting out, but loans issued by the Federal Housing Administration (FHA) that come with relatively low downpayments have not been offered in many condo buildings.

FHA approval for a condo is more complicated the FHA approval for a single-family home. To minimize its risk, FHA looks at more than the unit requesting a loan – it also considers traits of the association itself. Associations can help individual condo sellers get an FHA loan by becoming certified, but fairly stringent rules kept many from applying.

That may change and, according to the Community Associations Institute (CAI) Chief Executive Officer Thomas Skiba, it’s “excellent news for sellers, buyers, condominium communities and the housing market across the country.”

In creating its certification system, FHA listed traits considered desirable. Certification was denied, for example, if an association had too many rental condominiums or too much commercial space.

According to real estate writer Kenneth Harney, the previous certification process also presented considerable risk to associations. During the application process, Harney says, they were asked to “accept broad legal liability on matters they couldn’t totally be certain about, such as disputes among tenants in the building, litigation filed with courts” and more.

CAI says the FHA made “temporary adjustments.” While it applauded FHA’s guidelines, it says it will continuing pushing for “long-term certainty of process, flexibility and support for the future of condominium housing, and to resolve critical policy areas not addressed by today’s announcement.”

Major changes

• FHA looks at the percent of current condo owners who are delinquent on mortgage payments. The cutoff is 15 percent, but the individual standard was 30 days late; it’s now 60 days late.

• New rules require at least 50 percent of units to be inhabited by owner-occupants or under contract, while the other 50 percent may be owned by investors. A single investor can own up to 50 percent of the units; previously, single investors could not own more than 10 percent.

• The amount of commercial space is limited now, as it was before, to 25 percent. However, a new rule gives associations a little wiggle room. In certain circumstances, they can request a variance up to 35 percent for commercial space, providing the development remains “primarily residential.”

FHA’s new guidelines are outlined in Mortgagee Letter 2012-18 issued by the Department of Housing and Urban Development.

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