New FHA Guidelines Try To Protect Condo Buyers

Beginning February 1, 2010, FHA will implement new approval guidelines for condominium projects. To qualify for FHA mortgages, associations must:

•Maintain a reserve equal to 10% of the annual budget;

•Make sure no more than 15% of its owners are more than 30 days late with condominium fees;

•Allow lenders to review the HOA's financials and insurance policies;

•No more than 10% of the units may be held by a single investor;

•Fidelity insurance must be obtained for 20+ unit projects; and

•No more than 25% of space may be used for commercial purposes.

Though HOA's may find it painful to fulfill these requirements, in the long-term, meeting these new regulations will protect property values.

Associations that have been dragging their feet to update their HOA documentation will now have a financial incentive to "put their house in order". Lenders, knowing a condominium meets these new rules, will be more willing to lend to an approved project.

And FHA approval can only make the condos more attractive to prospective buyers. Knowing the project meets these new, tighter guidelines, a buyer can have more confidence in the quality of their investment.

Condo Loans Now Easier to Get

When the real estate market takes a downswing, condominiums are often hit the hardest. Part of the reason for this is that, as condos go into default, it becomes more and more difficult for the overall project to qualify under the lender's guidelines. So even if the individual borrower is qualified, the loan is denied because the complex does not meet the underwriting rules.

HUD has responded to this problem by changing condo lending rules. Some of these changes will make it easier for condominium owners, or would-be owners, to get loans.

Perhaps the most important change is that HUD has relaxed the rule which defines what percentage of a project needs to be sold before FHA will insure the loan. In the past, 50% of a project had to be owned by someone other than the developer. This made it difficult for the developers of new condo projects to find loans for prospective buyers. This percentage has now been dropped to 30%.

HUD still requires that at least 50% of the units be owner-occupied. But they will no longer count vacant or tenant-occupied, bank-owned properties when calculating this percentage.

So if you have tried to get a condo loan, either for refinance or purchase, and were told your condo project did not qualify, try again. It just may be that, under these new guidelines, your loan will be approved.