FHA Condo Approval Changes Compound Housing Woes, Limit Condo Options

If you own a condo, or hope to buy one someday, changes in FHA’s mortgage program could end up costing you — and further crimp the housing market.

More and more condo sellers and buyers are being shut out of the housing market. That’s because of tougher condo qualifying rules for FHA loans — on top of an already tough lending market.

You may not realize it, but buyers can’t use an FHA loan to purchase just any condo. You have to buy in a condo community that’s been vetted by FHA and approved — and your condo board has to re-certify every two years.

Since FHA insures about one-third of consumer mortgages, the lack of FHA financing is contributing to depressed or artificially low condo values. All this adds up to more unnecessary uncertainty for the housing sector.

Why is FHA important?

Credit-worthy buyers like FHA because they can become home owners with a 3.5% down payment compared with having to put down up to 20% for a convention loan. An affordable down payment option is especially important when you’re a first-time buyer.

The lack of FHA mortgages has hurt the condo market from South Florida to California. Between December 2010 and September 2011, only 2,100 of the 25,000 condos (that’s 8.4%) nationwide whose approvals expired were able to renew their approval, FHA Spokesman Lemar Wooley told housing columnist Ken Harney.

What does this mean for sellers?

If your condominium doesn’t have FHA approval and your condo board can’t or won’t get it approved or re-certified, buyers can’t use an FHA loan to purchase your home. When one-third of condo buyers are looking at only 8.4% of the condos on the market (instead of your unapproved condo), your value is going to nose-dive.

What does it mean for buyers?

If you’re considering buying a condo with an FHA loan, the rules limit your choices. You’ll have to confine your home search to approved condominiums.  Since all other FHA condo buyers are doing the same thing, you’ll compete with more buyers for the approved condo you want. More competition means you’ll likely end up paying more when you buy.

FHA condo approval rules too tough

Bottom line: The rules driving condos away from FHA approval are unrealistic given the current housing market and economic conditions.

If more than 15% of your neighbors are more than 30 days late paying their condo fees, your building can’t get approved. Since condo associations don’t report late payments to credit bureaus, home owners association (HOA) dues are often the last bill paid. Right now, 30,000 U.S. community associations have delinquency rates above 20%, according to the Community Associations Institute. If an association is in good financial shape, then having 15% of owners paying 30 or even 60 days late shouldn’t be a huge issue.

No more than 50% of the homes in your condo building can be rentals and any units a bank owns (like foreclosed units) count as rentals. That’s problematic in today’s economy, but there’s no data to support the idea that having 50% owner occupancy is good or bad. It would make more sense for FHA to look at the overall health of the condominium association.

No more than 25% of the building can have mixed-use commercial space. Connecting jobs to housing reduces transportation costs and saves energy, so removing this rule makes sense from an environmental standpoint.

Your condo’s board members have to certify the condo meets state and local laws pertaining to condominiums and don’t know any reason that home owners might become delinquent on their dues in the future. If it turns out not to be true, they could be fined $1 million and sent to jail for 30 years. That potential punishment frightens condo board members — many of whom are volunteers — who then decide not to apply for FHA approval or re-certification.

The FHA rules are wrong for buyers, for sellers, and for the housing market. First-time, credit-worthy home buyers need to be able to buy condos using FHA’s 3.5% down payment. Empty-nesters looking to downsize into condos deserve access to safe, affordable FHA loans, too. If sellers can’t sell their units to a whole segment of buyers (those using FHA), the price they can get for their home will fall.

Unit we move new owners into some of the millions of condos now sitting vacant, the housing market can’t recover.

Will the FHA rules impact the housing market?