New FHA regs change condo financing

FHA recently implemented some new requirements for condominium financing and some Pennsylvania REALTORS® have noticed the difference.

Darlene Shannon, a representative with the Federal Housing Administration (FHA), said spot loans were previously given in projects that did not have FHA project approval. “The spot loan approval process as defined in 1996 is gone as of February 1. The DELRAP (lender approvals) and HRAP (HUD approvals) have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a ‘spot loan’ basis,” she said.

Shannon said condos have to meet eligibility requirements outlined in the Housing and Urban Development (HUD) Mortgagee Letter issued in November.

Some of the new requirements include:

• Minimum of two or more units
• No more than 25 percent of the property’s total floor space can be used for commercial purposes
• No more than 15 percent of the total units can be more than 30 days past due in the association fees
• At least 50 percent of the total units must be sold prior to an endorsement of a mortgage
• Homeowners’ association budget must have adequate cash reserves.

Condo sales are about 70 percent of Adrienne “Abe” Wagner’s business at Prudential Preferred Realty in Donegal. She’s been selling condos in her resort market for 20 years and recently  had mortgages denied based on the new regulations.

“We’ve never had a problem with financing,” she said. “We were definitely blindsided with these issues. It’s never happened before and it caught us by surprise.”

REALTOR® Allan Domb of Allan Domb Real Estate, Philadelphia, has noted the changes as well. He says condo financing can take three to five times as long as it used to, the availability is tougher and there are more complications.  Condo sales account for about 99 percent of his business.

“The pendulum has swung to the other extreme from the days when anyone who could fog a mirror could get a loan,” Domb said. “All financing is more challenging than it was two years ago. We’re paying the price now for unhealthy lending that went on for four or five years and it’s a good adjustment.”

Jed Smith, National Association of REALTORS® (NAR) managing director, quantitative research, said, “In many areas, there’s an oversupply of condos. FHA has announced some changes in the rules for financing condos and what circumstances they’ll underwrite.

“FHA, Fannie Mae and Freddie Mac have also tightened up lending restrictions. There’s less financing available in places where investors own a significant number of the units. In many areas, condos are somewhat depressed in price and financing has become more of a problem,” he added.

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