- The Washington Times - Friday, August 7, 2009

Loans insured by the Federal Housing Administration (FHA) have become increasingly popular with first-time homebuyers, who are attracted by the low down payment requirement of 3.5 percent instead of the typical 20 percent needed for conventional loans.

Condominiums appeal to first-time homebuyers because they require low maintenance and, often, are more affordable than detached homes. However, condominium ownership - and financing - differs slightly from owning and buying a single-family home.

FHA rules have been readjusted, with new regulations (starting Oct. 1) that could make it more difficult for condominium buyers to obtain government-insured loans. The Department of Housing and Urban Development’s (HUD) Mortgagee Letter 2009-19 will allow lenders greater flexibility when reviewing condominium documents. However, some of the FHA loan guidelines could have a restrictive effect on condominium borrowers.

Some of the changes in rules are very small. For example, the new rules say the FHA will require that 51 percent of condominium homes be owner-occupied, while current rules require 50 percent of the units to be owner-occupied.

Other new rules say that the FHA won’t insure condominiums in buildings where more than 10 percent of the units are owned by one investor, or if more than 30 percent of the units are already being financed with FHA loans.

Another big concern for lenders, which should also concern potential condominium buyers, is the number of current owners who are behind in their condominium dues. Under the new rules, no more than 15 percent of the owners can be 30 days or more past due on their condominium fees in order for a new buyer to obtain an FHA-insured loan.

“In all the condominiums we’ve been involved with, only one had a big problem with tenants getting behind on their condo fees,” says John Fitzgerald, a partner with Tenacity Group, which provides apartment conversion services, financial services and manages condominium projects in the Washington area. “At that time, about 28 percent of the tenants were delinquent in their dues so no one could get financing to buy into that building. I actually think [the new rule] is a good thing because if the condominium board members and tenants know that they won’t be able to sell homes in the building, they will be better at enforcing the payment of fees.”

Mr. Fitzgerald adds that once residents stop paying their condominium fees, a building can deteriorate quickly. As maintenance is deferred and cosmetic improvements are neglected, the value of individual units will usually drop.

Historically, condominiums are considered higher-risk investments than single-family homes because lenders see more loan defaults and problems because of buyers mishandling finances. Although many condominium buyers are first timers, there may also be a high number of investors (who may be taking more financial risks than buyers who intend to live in a home).

“Lenders have always had different rules for condominiums, which can sometimes make it harder to get a loan,” says Bruce Majors, a Realtor with RE/MAX Supreme Properties in the District. “Lenders want to limit their risk on any particular building so, for instance, they won’t make more loans for buyers in a building where one investor owns too many units or where more than 50 percent of the units are occupied by renters.”

Condominium builders and developers converting apartments to condominiums can apply for FHA loan approval, which means buyers in those buildings can apply for an FHA loan without restrictions.

Mr. Majors says, “Back in the 1990s, there were only about five or six condominiums in the Dupont Circle area that were FHA approved. Not very many buyers were using FHA loans just a few years ago. Now, for most newly built buildings, the developers have sought FHA approval to make it easier for buyers to get loans.”

FHA loans have maximum limits, which restricted their use in the past in the expensive Washington area housing market. Since the limits were raised to $729,750 in February, more Washington area homebuyers can take advantage of these loans.

For buildings that are not FHA approved, lenders can do what they call a “spot approval” for an FHA loan for an individual, as long as the building meets certain guidelines that consider the financial viability of the condominium association.

In other words, for condominium mortgages, lenders are looking not only at the creditworthiness of the individual borrower, but also the creditworthiness of the entire building. The management of the condominium, the payment of dues by other owners, the budget for the association and the activities of the condominium association board can all have an impact on the value of individual homes within the development.

“All of the Kettler condominium developments in the Washington area have FHA loan approvals, which we think has had a big [positive] impact on sales,” says Cyndi Gordon, director of condominium operations at Kettler, which has developed such locations as Midtown Reston Town Center and Midtown Bethesda North. “Before the FHA threshold for loans was raised, very few of our units qualified for these loans. But now virtually every price point has an opportunity to use these loans. Over the past year, about 80 percent of the units we sold were financed with FHA loans.”

“FHA loan approval is absolutely crucial to sales in our condominium buildings because these are the loans that the majority of our buyers use, especially in places that are priced under $350,000,” says Mr. Fitzgerald. “In buildings that do not have FHA approval and where buyers cannot obtain spot approvals for a loan, sales are basically nonexistent. The reason is that even on an entry-level condominium home of $199,000, a 10 percent down payment, which is absolutely the bare minimum allowed by a conventional lender, comes to $19,000. Plus, the buyer needs more money for closing costs. Very few first-time buyers, especially if they are looking at that price range, have that kind of cash available.”

Mr. Fitzgerald says that spot approval for FHA loans is usually an option, as long as the building is well-managed and well-maintained.

“A spot approval requires the lender to look at the legal and financial documents of a condominium to be sure they are accurate and meet certain guidelines,” says Char-Lee Smith, a mortgage consultant with MetLife Home Loans in McLean. “Some of the most important guidelines look at whether a special assessment is pending or has been approved and looks at the reserve funds of the condominium association. Basically, there’s just a checklist that we use and, as long as the answers to the questions are positive, then an FHA loan is possible. The main point is to make sure that the building is in good financial shape and that there are not too many investors.”

Lenders anticipate that the new FHA rules will require a more thorough review of condominium documents, which can benefit borrowers as well as lenders. If an FHA loan approval cannot be made, this might mean the purchase itself is not necessarily a wise investment. Buildings with financial or management problems are considered a high risk by lenders and should be viewed that way by buyers, too.

Condominium buyers who are unable to obtain an FHA loan approval for their preferred home have two options. They can apply for a conventional loan, which means they will need a larger down payment and perhaps need to pay larger upfront fees at the settlement; or they can continue searching for a home in a building that already has obtained approval for FHA loans.

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