FHA eases condo rules, but is it enough?

Many borrowers who have tried to purchase a condo with an FHA mortgage in the past couple of years have bumped up against a frustrating dilemma: the condo they want to buy is not approved for FHA financing.

FHA condo buyers face a double application process: both the borrower and the condominium must meet the lender’s requirements. The FHA maintains a list of approved condominiums and recently revised its guidelines for placing developments on that list. Borrowers can only use FHA loans in buildings that already have FHA approval.

Carol Galante, acting FHA commissioner, said at the recent Northern Virginia Association of Realtors’ 2012 Economic Summit in Fairfax, Va., that the new guidelines should make it easier for condo buyers, particularly buyers of newly built condos, to obtain an FHA mortgage.

Here are some of the main changes to the FHA condo lending rules:

• Condo fee delinquency rule. While FHA loans still cannot be approved for developments where 15 percent or more of owners are delinquent on their condo association dues, Galante said that the FHA has “redefined delinquency to 60 days past-due rather than 30 days.” This should increase the number of eligible condo developments and allows homeowners more time to bring their dues up-to-date.
• Clarification of investor ratios. FHA rules say that 50 percent or more of the units within a condo development must be owner-occupied for the development to be on the approved list. The new guidelines still stick to the 50 percent rule, but that ratio may be easier to achieve.
“People who own a condo as a second home, which I know is popular in places like San Francisco and in resort areas, are not counted as investors in that investor/homeowner ratio,” said Galante. “Also, for new developments we’re not counting the units that have yet to be sold by the developer as investor-owned. We’re also looking at projects on a phase-by-phase basis rather than expecting 50 percent of the units to be sold before FHA financing is available.”
A single investor or several investors can now own up to 50 percent of the units within a development, when previously any one investor could only own 10 percent of a condo community. However, this applies only when at least 50 percent of the homes are either already owned or are under contract to owner-occupants.

• Making mixed-use development easier. “Right now our rules say that only 25 percent of the space in a condominium development can be used for commercial space rather than residential use, but that doesn’t work very well for smaller developments,” said Galante. “We want to support mixed-use developments, so we’ve put in place a process for exemption requests for developments with up to 35 percent of their spaced used for commercial purposes.”

While these changes can ease the way for some condo buyers, one FHA rule that impacts many borrowers has not been adjusted: only 50 percent of the units within a condo development can be financed with FHA loans. So even if you find an FHA-approved building, if your loan will put the FHA total over the 50 percent limit, your application will be denied.

While any easier condo financing rules are welcome, the FHA may need to make some more changes before FHA condo financing becomes widely available again.